When it comes to mortgages, it can be easy to get overwhelmed by the sheer number of options! Fortunately, we are here to help! Below are some of the mortgage details that you should understand to ensure that you are getting the best mortgage for YOU:
Interest Rate Type
Interest rate is one of the major components to your mortgage and it is important to decide whether you want a fixed-rate, variable-rate or protected (capped) variable-rate mortgage.
A fixed-rate mortgage is ideal for new home owners or those on a fixed income who are more comfortable with a stable monthly payment.
A variable-rate mortgage (VIRM) is ideal for individuals who have room in their budget and want to take advantage of potential interest rate drops – keep in mind, lenders with the VIRM products don’t automatically increase your payments if the variable rates go up. You should contact your lender if you want to “stay on track” and continue to pay off your mortgage as quickly if rates do rise.
A adjustable (variable) rate mortgage (ARM) is another form of a variable rate mortgage, however, the main difference is that this acts like a normal variable where payments rise and fall as the rates rise and fall.
Amortization
This is the life of your mortgage and is typically a 25-years period whereby you would pay off the entirety of the loan. You can choose a shorter amortization period if you’d like, which would result in higher payments but allows you to pay less interest over the lifetime of your mortgage and be mortgage-free faster! Or, you can opt for a longer amortization period (up to 30 years with A lenders in Canada), which allows for smaller monthly payments, and increased qualification.
Payment Schedule
This is the frequency that you make mortgage payments and ranges from monthly to semi-monthly, bi-weekly, accelerated bi-weekly or even weekly payments. There are many great calculators on My Mortgage Toolbox app (available through Google Play and the Apple Store) that can help you calculate and compare these payment schedules to see what works best for you.
Mortgage Term
The standard mortgage term is 5-years and refers to the length of time for which options are chosen and agreed upon, such as the interest rate. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options. The most common terms available in Canada are 1, 2, 3, 4, 5, 7, and 10 year fixed rate terms. Most Variable rate terms are 5 years.
Open vs. Closed
Open mortgages give you the option to increase mortgage payments or make unlimited lump sum deposits on your loan without penalty. A closed mortgage will not allow you to payout your mortgage without penalty. With closed mortgages however, you typically have a limit to how much you can prepay without penalty with each lender.
High Ratio vs. Conventional
A conventional mortgage is where you put the standard 20% down on your home. However, as not everyone is able to do this, many buyers will end up with a high-ratio mortgage product. High-ratio mortgages need to be insured due to financial institutions only being allowed to lend up to 80 percent of the homes purchase price WITHOUT mortgage default insurance. Therefore, if you choose a high-ratio mortgages over a conventional one, you will have an insurance premium added to your mortgage balance.
Written by the DLC Marketing Team
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