Answering Your Mortgage Questions – What You Need to Know

August 24th, 2012  |  Published in General  |  3 Comments

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:

Open Mortgage

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.

Closed Mortgage

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.

Convertible Mortgage

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.

  

Responses

  1. Sherry says:

    August 25th, 2012 at 7:55 pm (#)

    The different mortgage types and the jargon have always been confusing; overwhelming much like picking a cell phone plan. My husband and I are thinking of buying another home, upgrading, and would be doing this prior to retirement. There’s a lot to understand and think about first. This is a good blog with sound info.

  2. Brian from medigapgroup.com says:

    August 26th, 2012 at 7:48 pm (#)

    Thanks for sharing. I actually work with senior citizens every day, helping them cover the out of pocket gaps brought on by government Medicare. It’s important to me that I help my clients out in any way possible. I try and give them information that I think might be beneficial to them in their current predicaments. I know that they would really appreciate this type of material! I will definitely be passing it along as soon as possible. If you ever get the opportunity, feel free to check out our brand new website. We’d really appreciaite any type of feedback that you may have. Thanks again for sharing, and keep up the good work!

  3. James says:

    August 27th, 2012 at 10:45 am (#)

    Okay – on thing that is not discussed here, but is nonetheless important is the whether mortgages are assumable. In some cases, if you are buying or selling a property it might make sense to see if the mortgage can be transferred or sold. This can matter almost as much as the terms if you are interested in advanced finance.