Answering your mortgage questions – what you need to know
Buying your first home is at once exciting and overwhelming. You finally have a place to call your very own, but you also have to worry long-term about financing your mortgage. Before you start talking with lenders, educate yourself about the types of mortgages and think about the one that might be best for you. Let’s review some of your options:
The main benefit of an open mortgage is that you can repay the mortgage back at any time without incurring penalties. Fixed-rate open mortgage terms range from six months to one year, while variable open mortgage terms range from three to five years. Due to the fact that you can make prepayments—or even pay off the mortgage completely—open mortgage rates tend to be higher than closed mortgage rates. Open mortgages are especially attractive for recipients of large lump sum payments—inheritances, insurance claims, and divorce settlements, just to name a few.
Unlike open mortgages, closed mortgages require you to pay a penalty if you want to make larger prepayments, pay off your mortgage in full, or refinance your mortgage. However, interest rates tend to be significantly lower on closed mortgages. Because the terms of a closed mortgage range from six months to ten years, they are a good option for most homeowners, who will spread out their payments over a number of years. Closed mortgages aren’t completely inflexible: most allow you to make a lump sum payment up to a certain percentage (say 10%) on your principal every year, or start increasing your monthly payments at the beginning of a new term.
The third main type of mortgage is the convertible mortgage. The terms of this mortgage are short—six months or one year. With a convertible mortgage, you can take advantage of short term fixed payments with the option of extending your mortgage up to ten years after the initial trial period. If you are unhappy with the terms, you can transfer your mortgage to another lender. This option is a particularly good one if rates are on their way down or will be in the immediate future.
Understanding Fixed and Variable Rates
The second big consideration you will need to make is whether you want a fixed or variable interest rate mortgage. The former is attractive because rates never change throughout the term, so you’ll know exactly how much you’ll need to budget for your payments well in advance. On the other hand, variable interest rates fluctuate with the market, so rates may dip significantly lower than fixed ones. As there is more risk involved with this option, check to see if the lender has an interest rate cap or convertibility features to protect yourself from high interest rates. A mortgage agreement is a big decision; do some thorough comparison shopping at RateSupermarket to find the best terms before you commit.