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Choosing The Right Mortgage For You
This article will help you understand the differences between
a variety of mortgage options. There are many different mortgage
products offered by the various lending institutions in Canada,
so you may not know what features to look for.
As you'll see, each type of mortgage has slightly different
features which appeal to a variety of different preferences. For
example, some home buyers take comfort in knowing that the amount
of their mortgage payments will be the same throughout the entire
term of their mortgage. Other home buyers may be willing to
accept some fluctuation in the amount of their mortgage payments
in exchange for the potential long-term savings or the change to
pay off their mortgage faster.
The right mortgage for you in the one that best matches your
overall comfort level and fits with your income and
lifestyle.
Conventional or High Ratio
A conventional mortgage is a loan for no more than 75% of the
appraised value or purchase price of the property, whichever is
less. The remaining amount required for a purchase (25%) comes
from your resources and is referred to as the down payment. If
you have to borrow more than 75% of the money you need, you'll be
applying for what is called a "High-Ratio Mortgage". Here's how
it works:
You must have at least a 5% down payment when you buy a home.
Any down payment between 5% and 24% is considered a high-ratio
mortgage, and the mortgage must be insured by the Canadian
Mortgage and Housing Corporation (CMHC) or GE Capital Mortgage
Insurance Company (GEMICO). The insurer will charge a fee for
this insurance. The amount of the fee will depend on the amount
you are borrowing and the percentage of your own down payment.
Typical fees range from 0.5% to 3.75% of the value of your home.
This amount can be paid up front or added to the principal amount
of your mortgage. A Mortgage Specialist or Mortgage Broker can
help you determine the exact amount of the fee.
Fixed Rate or Variable Rate Mortgage
When you take out a fixed-rate mortgage, your interest rate
will never change throughout the entire term of your mortgage. As
a result, you will always know exactly how much your mortgage
payments will be and how much of your mortgage will be paid off
at the end of your term.
With a variable rate mortgage, your rate will be set in
relation to the lending institution's Mortgage Prime Rate at the
beginning of each month. In other words, it will vary from month
to month. Historically, variable-rate mortgages have tended to
cost less than fixed-rate mortgages when interest rates are
fairly stable. When rates change, your payment amount remains the
same. However, the amount that is applied toward interest and
principal will change depending upon the interest rate that
month.
If interest rates drop, more of your mortgage payment is
applied to the principal balance owing. The can help pay off your
mortgage faster. However, if interest rates rise, more of your
monthly payment is taken up by your interest payment.
Short-term or Long-term
The "term" is the length of the current mortgage agreement. A
mortgage typically has a term of six months to 5 years. Usually,
the shorter the term, the lower the interest rate.
A "short-term" mortgage is usually for two years of less. A
"long-term" mortgage is generally for three years or more.
Short-term mortgages are appropriate for buyers who believe
interest rates will drop at renewal time. Long-term mortgages are
suitable when current rates are reasonable and borrowers want the
security of budgeting for the future. The key to choosing between
short and long term is to feel comfortable with your mortgage
payments.
After a term expires, the balance of the principal owing on
the mortgage can be repaid, or a new mortgage agreement can be
established at the then-current rates.
Open or Closed
Open mortgages can be paid off at any time without penalty and
are usually negotiated for very short terms, They are suited to
homeowners who are planning to sell in the near future or those
who want the flexibility to make large, lump-sum payments before
the end of the term.
A closed mortgage has a locked-in interest rate for the full
term of the mortgage. Most first-time home buyers prefer a closed
mortgage because they want to enjoy the comfort of steady,
predictable mortgage payments. If you want to re-negotiate your
interest rate, or pay off the balance, you will need to wait
until the maturity date or pay a penalty.
About The Author
John Carle & Sharon Gregresh are Realtors with Royal
LePage - ArTeam in St. Albert, AB. They pride themselves on
providing more than just real estate sales and listings. Their
clients benefit from a much larger spectrum or real estate
services. Contact them any time at information@workingtogether.ca
or through their website at www.workingtogether.ca. They can be reached by phone
at (780) 458-5595
 MORE RESOURCES updated Sun. March / 21 / 2010
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