What Mortgage To Choose
Choosing a mortgage means more than looking for good interest rates. Usually, you'll have to do that more than once untill you entirely pay for your house. Unlike other loans, mortgages have more features. If they don't match your situation getting rid of the debt may be difficult.
Your Down Payment
Conventional Mortgage - The lower your down payment the greater risk your lender will have to take. A large down payment of 20% or more of the purchase price will qualify you for this type of mortgage.
That means you won't have to buy mortgage insurance protecting your lender when you default your your on payments.
High Ratio Mortgage - If you save less than 20%, but not less than 5% of the purchase price you can only get a high ratio mortgage which must be insured.
Mortgage insurance makes home buying possible for those who didn't save at least 1/5 of the price, but have enough income to afford higher mortgage payments and to cover the cost of insurance.
Closed or Open
Closed Mortgage can't be paid off without a penalty before its term expires. Mortgage term is a period of time (from six months to ten years) for which a mortgage agreement is made.
The whole mortgage becomes due at the end of a term, unless it's renewed for another term with a new contract. Most homeowners require more than one term to repay their mortgage.
Closed mortgages have lower interest rates than open mortgages, and many lenders allow extra annual payments of 10% - 20% of the outstanding balance, without pre-payment penalties.
Open Mortgage is more flexible since it can be paid off faster, without a fine. Despite a higher rate extra payments can save you thousands of dollars in interest charges. It's a good choice if you plan to sell your house, or anticipate an extra income in the near future.
Fixed vs. Variable
Fixed Rate Mortgage has a specific, steady interest rate for the entire term. These mortgages can be open for a short term and are closed for a long term. Fixed rates are the lowest for a six month term, and they grow along with the term length.
Variable Rate Mortgage is closed, and its interest follows market rates fluctuations throughout the term. Variable interest rates are usually much lower than fixed rates for a long period of time, such as a five year term.
See an example how fixed rates may grow over time, and how they can compare to variable rates:
If rates drop you will pay off your mortgage faster due to a lower cost. On the other hand, when interest rise it will take longer to repay a mortgage and your cost will increase.
Variable rate mortgages provide some security and flexibility in a long term. Mortgages for five year term usually can be switched from closed to open after three years, and if your term is at least three years you can lock into fixed rates at any time without a penalty.
Convertible Mortgage might be a solution for those who hesitate what to choose. Borrowers who want to keep their options open for some time can choose this type of a short term (six months or one year) fixed rate closed mortgage.
When the initial short term expires, the rate may be locked in for a longer term (three years or longer).
Short Term vs. Long Term
Short Term Mortgage has a term shorter than three years. Long Term Mortgage is for a three to ten year term. A short term financing cost less in interest but lacks the security of a long term option.
Carefully analyze your risk tolerance with regard to the length of a term. If you are confident that interest rates won't be rising and can afford a higher borrowing cost in case they do, than a short term option may be right for you.
If you can't repay the mortgage during one term, you'll need more financing for the oustanding balance. You don't have to stay with the same lender, and are free to look around for the best deal before the first term is over.
It's another mortgage registered on the same property. These mortgages are often taken by homeowners who already accumulated some equity in their homes, and use it as a collateral to borrow more funds.
The maximum amount available is 80% of the appraised value of a house, reduced by the unpaid balance of the primary mortgage.
A second mortgage has to be paid back over a shorter period of time than the primary loan, and your total monthly payments will increase for a more intense 5 - 10 year repayment schedule.
Lenders charge more interest than for primary mortgages, due to a higher risk. If you default your primary mortgage is repaid first with proceeds from the sale of a house.
The remainder is be used to pay off the second mortgage. This may not be enough to recover the funds. That's why second mortgages carry higher interest rates.
However, second mortgages can still compete with other types of unsecured credit like personal loans and credit cards. Rates depend on your share in the house, and the more equity you have the less interest you will have to pay.
Some lenders will let you move an existing fixed rate closed mortgage to another property. If you negotiate mortgage portability, will be able to transfer your rate, balance and term ending date.
You will avoid the prepayment penalty and can save money on interest rates, if they rise by the time when you move. Extra funds for your new house can be borrowed at current rates.
In order to attract more buyers some builders offer own financing at lower rates. These mortgages aren't renewable. When the builder's mortgage term expires you will have to find a new lender.
Vendor Take Back - You pay a portion of the price to a builder in installments, and at favourable interest rates. The rest is covered by the money from a bank and your down payment.
Interest Rate Buy Down - A builder pays your lender a lump sum of money when you obtain your loan. In return, the lender may reduce your interest or increase the mortgage amount.