Buying a home or any other real estate is an exciting time in most people’s lives that can also be a little bit stressful. On top of making sure you find the right home and the right mortgage, there’s a lot of terminology you need to understand when it comes to real estate and mortgages.
We cover the basics of mortgages in this post so that you know what type of mortgage will best suit your needs. The next step will be shopping around for one. You may want to start by comparing mortgages online first. There are companies like that will give you your credit score and recommend mortgages based on that score for you to compare. Doing so can save you a lot of time and running around.
The First Factor: Your Down Payment
If the money you’ve put away for a down payment on a home is less than 20% of the purchase price, you’ll be looking at what’s known as a high-ratio mortgage. This doesn’t necessarily mean a higher interest rate, high-ratio mortgages require mortgage insurance which cuts down the risks to lenders making it easier for them to offer you reasonable interest rates.
Having a higher down payment gives you the option of a paying back the mortgage faster, which can save you money in the amount of interest you pay.
How Long Do You Want Your Mortgage to Last?
This is known as the amortization period. You can reduce the amount of your mortgage payments by choosing a longer amortization period but doing so means paying more money in interest. For high-ratio mortgages, the maximum allowed amortization period is 25 years.
The conditions of your mortgage contract typically have to be revisited every so often during the life of the loan. The amount of time between these mortgage renewals is known as the mortgage term. They can range from a few months to a few years. Your choices are short-term, long-term and convertible.
Choosing a short-term mortgage gives you the ability to renegotiate your mortgage sooner rather than later which is ideal if you think you’ll be moving in the near future or if you feel you’ll be able to get a better interest rate when the term is up. The downside to a shorter term is that you may end up having to pay a higher interest rate if interest rates have increased when you’re renewing your mortgage.
A long-term mortgage may be more suitable for you if you prefer to lock in your current interest rate and want to know what your mortgage payments will be to budget your finances. Of course, locking in your interest rate could mean missing out on a better one if rates go down.
A convertible term allows you to extend a short-term mortgage to a longer term at the interest rate provided by lenders for their long-term mortgages.
Interest rates can either be:
Fixed at a certain rate for the term of your mortgage. This can mean a higher rate than a variable rate but is the right choice if you feel that interest rates will be going up and/or if you prefer keeping your payments the same for the duration of your mortgage term.
Variable interest rates can be lower than fixed rates but are not stable and can either increase or decrease over the term of the mortgage. If you’re comfortable with that, this may be the option for you. With a variable interest rate, you can also choose whether your payments are fixed at a certain amount or adjustable.
Fixed payments with a variable interest rate means that if interest rates increase, more of your payment will go towards paying interest and if the rates go down, more of your payment will be applied to the principal.
Adjustable payments with a variable interest rate increase or decrease with the interest rate. This is because you’ve ‘locked in’ how much of the principal you want to pay down during the term of the mortgage which means your payments will either go up or down to accommodate the current interest rate.
Open Mortgages, Closed Mortgages
Your mortgage can either be open or closed. Open mortgages allow you to make extra payments towards the mortgage outside of your regular mortgage payments. These are known as prepayments. Open mortgages also allow you to pay off the mortgage completely, renegotiate the mortgage and change lenders, all before the end of the mortgage term, without paying a penalty. An open mortgage is ideal for borrowers who want the freedom to make lump-sum prepayments when they get the chance, are thinking of moving before the end of the mortgage term or want to pay off the mortgage before the end of the term.
Closed mortgages generally have lower interest rates than open mortgages but they limit the number of prepayments you can make towards the mortgage. A closed mortgage may be what you’re looking for if you plan on staying in your home for the duration of the mortgage term and if you’re ok with the limits your lender puts on prepayments.
You can choose to pay your mortgage in monthly, semi-monthly (twice a month), biweekly (every two weeks) or weekly instalments. There are also options for accelerated biweekly or accelerated weekly payments that allow you to make an extra month’s payment every year to help you pay off the mortgage faster.
And Finally, Make sure you Understand the Fine Print
There will be more terms and conditions of the mortgage contract when you’re ready to commit to one. Just make sure you ask your mortgage professional about all of them before signing on the dotted line.