Mortgage 101
If you’re new to the homeownership you probably have a lot of questions surrounding mortgages. Should I choose an open or closed mortgage? How long should my amortization period be? Are monthly or bi-weekly payments a better option? There a lot of unknowns and it can be overwhelming, which is why we’re hoping this blog post may help clear up some confusion that you may have.
Open vs. Closed
Open
If you have more than enough money to cover the monthly payment then some you may consider an open mortgage, as it allows you more opportunity to put additional money down while paying your mortgage off faster. It’s important to keep in mind though that the interest rate on an open mortgage tends to be higher than those of a closed mortgage. An open mortgage also allows you more flexibility regarding changing lenders, paying off your mortgage before the end of the term, as well as renegotiating it before the end of term. If your income is healthy and you don’t live pay cheque to pay cheque an open mortgage may be the right choice for you, as it will allow you to pay it off sooner or put down a lump sum without penalty. If you see yourself moving anytime in the near future an open mortgage would also be the best choice for you.
Closed
If your income is quite fixed, and you don’t see yourself coming into any additional money anytime soon a closed mortgage may be the best choice for you. Closed mortgages tend to offer lower interest rates, however; they don’t offer as much flexibility when it comes to putting additional money down. For most new homeowners closed mortgages can be the safest option as you adjust to the payments. If you’re planning on staying in your current home until your term is up a closed mortgage will work well in your favour. Keep in mind that if you do choose to move and have to break your mortgage, you will be charged a penalty (generally it costs $5000).
Amortization Period
Ah, the dreaded decision of the amortization period. While most conventional mortgages are 25 years in term it is possible to sign on a shorter amortization period. It’s important to know though that the longer the amortization period the lower your payments will be, however; you will pay more in interest in the long run if you do decide to go with a longer amortization period.
Choosing a Term
When choosing a mortgage, you will have to choose your term. Terms vary from short-term to long-term so it’s essential to choose the right term for you. To simplify things, your mortgage term will be the length of time that your mortgage contract will be in effect.
Short-Term Mortgage
Short-term mortgages tend to be more common in today’s market, they also allow you more flexibility if you ever want to sell your home. They will provide a shorter period if you are hoping to renegotiate your mortgage. If you anticipate moving to a new home within the next five years, you may choose to go with a shorter-term mortgage. However, it’s important to note that if you sign at a low interest rate and rates have gone up by the time your term is over you will have to sign at the higher rate.
Long-Term Mortgage
Long-term mortgages will cost you more if you choose to break your mortgage for any reason, however; they will also allow you to lock in your rate for a more extended period of time. If rates are low when you sign it can be a good idea to take advantage of this and lock in your rate as long as possible, as this will help to give you more certainty when it comes to budgeting for the future as you will be well aware of your costs.
Fixed vs. Variable Interest Rates
This is where most people get scared – they hear the term interest and they completely clam up. Interest rates vary from bank to bank and even month to month. Ultimately, you’ll have to pay a lender to borrow the money for your mortgage and that is essentially what interest is.
Fixed
Fixed interest rates tend to be higher than variable interest rates and they also stay the same throughout the term. A fixed interest rate is the best choice for those who want to know how much of their mortgage will be paid off at the end of the term. They’re also a good option if you are hoping that over the term of your mortgage your monthly payments won’t change.
Variable
When choosing a variable rate, it is likely you’ll lock in a lower rate than if you had chosen a fixed rate. However, over the course of your term the rate does have the ability to increase and decrease.
Payment Frequency
Weekly
For a total of 52 payments a year you will make your mortgage payment every week.
Accelerated Bi-Weekly
For a total of 26 payments a year you will make your mortgage payment every two weeks.
Bi-Weekly
For a total of 24 payments a year you will make your mortgage payment two times a month.
Monthly
For a total of 12 payments a year you will make your mortgage payment once a month.
Accelerated Bi-Weekly
If you’re looking to save thousands of dollars, consider accelerated weekly or bi-weekly mortgage payments. This will allow you to make one extra monthly payment a year which will help you pay off your mortgage sooner than you may have thought.
