|So, you've decided that homeownership is right for you. For all
but the fortunate few, buying a home is synonymous with taking on a
mortgage. A mortgage is a security for a loan on the property you own. It is
repaid in regular mortgage loan payments, which are usually blended
payments. This means that the payment includes the principal (amount
borrowed) plus the interest (the charge for borrowing money). The
payment may also include a portion of the property taxes.
Most of the payments on a mortgage loan are for interests the lenders
charge for letting you use their money. The longer you take to repay
your mortgage, the more you will pay out in interest. On a mortgage
which is paid off over 25 years, depending on the interest rates
charged on your mortgage, the total amount of your payments could be
twice as much as
the amount originally borrowed, or even more.
There are many different types of mortgages. If you don't have the 20%
down payment for a conventional mortgage, you can get a high ratio
mortgage, combined with mortgage default insurance, that allows for a
smaller down payment.
Although mortgage loans allow people to buy homes sooner than
they ever could if they had to save to meet the purchase price, these
loans can be costly. Now you have to determine which type of mortgage you want.
The buyer can borrow up to 80% of the purchase price of the value of
the property, whichever is less. The buyer has to pay 20% down. A
congenital mortgage cannot exceed 80% of the value of the property.
High Ratio Mortgage
If down payment is less than 20% of the purchase price of the value of the home, buyer must pay mortgage default insurance. The maximum amortization period for mortgages with mortgage default insurance is 25 years.
Mortgage default insurance is only available for high ratio mortgages if the purchase price of the home is less than $1 million.
Allows borrowers to repay all or part of the total amount of their
mortgage at any time without penalty (prepayment charge). The interest
rate on an open mortgage is usually higher than on a closed mortgage
with a comparable term length. Because of flexibility an open mortgage
may be a good choice for borrowers who plan to sell their homes in the
near future or intend to make large prepayments.
Usually have lower interest rate than an open mortgage with a
comparable term length, but it lacks the flexible features of an open
mortgage. Closed mortgage contract will usually include prepayment
privileges. Prepayment privileges are subject to conditions, which vary
from lender to lender. For example, one lender might let you make a
lump sum payment equal to 10% of the original mortgage loan every year,
while another might only let you pay down 20% every year. Some lenders
might also allow you to increase the amount of your regular payments.
Closed mortgage is a good choice for those who want the security of
knowing their monthly payment is fixed for a longer term. Keep in mind
that if you want to change your mortgage agreement during the term, you
will usually have to pay a prepayment charge to break your mortgage
you apply for a mortgage, lenders may offer you options with either
fixed or variable interest rates. Some lenders also offer a "hybrid"
option that combines fixed and variable portions in the same mortgage.
The interest rate option (fixed, variable or hybrid) is decided
separately from the mortgage type (open or closed).
Fixed Interest Rate Mortgage
The interest rate and the amount of regular mortgage payments are fixed
and remain the same for the entire term of the mortgage. Borrowers know
in advance the amount of interest they will have to pay (assuming they
don't make any prepayments), and therefore how much of the original
loan amount will be paid off during the term.
Variable Interest Rate Mortgage
The interest rate can increase or
decrease during the term of the mortgage and varies with changes in
market interest rates. Borrowers usually have option to decide how
changes in interest rate affect their payments which can be fixed or
adjustable. The interest rates on variable rate mortgages are often
lower than on fixed interest rate mortgages with the same term length
when you sign your mortgage agreement. This may make variable interest
rate mortgages attractive in the short term.
In this combination mortgage, one part of the mortgage is financed at a
fixed rate and other part is financed at a variable rate. The fixed
portion gives borrower partial protection in case interest rates go up,
and the variable portion provides partial benefits if rates fall. The
portions may have different terms. For example, a hybrid mortgage may
include a two-year term for the variable portion and a three-year term
for the fixed portion. Hybrid mortgages that include portions with
different terms may be difficult to transfer to another lender.
You can spend approximately the same amount of money on your mortgage
each month and still save money by choosing an accelerated option for
Most mortgages now come with the standard payment options; this means
you can pay your mortgage at a frequency that matches your cash flow -
weekly, bi-weekly semi-monthly or monthly. Accelerated weekly and
accelerated biweekly payments can save you thousands, or even tens of
thousands in interest charges, because you will pay off your mortgage
much faster using these options.
The added benefit of the accelerated weekly and bi-weekly payments is that by dividing a
regular monthly payment into two or four respectively, and deducting it
at the new interval, an extra payment a year is made directly against
principal. The surprising effect of this one extra payment a year is to
reduce the amortization of the average mortgage by up to 6 years, with
enormous savings of cash at the end of the mortgage term.