Thursday, June 9, 2016
Open vs. Closed:
Open, describes the option to prepay without penalty allowing a borrower to make large lump sum payments or pay off the entire mortgage without incurring extra fees. This option generally comes with higher interest rates and shorter terms. This is a good option if you plan on selling your home soon, or need a short period of time to weigh your options before locking into a closed mortgage.
Closed, may set a limit on the amount or frequency at which lump sum payments are allowed. Should you choose to pay off your mortgage before the end of term you will most likely be charged a penalty. As such they are not a good option if you plan on moving in the near future. They do however involve fixed payments allowing a homeowner to adjust to a new budget that now includes regular mortgage payments. Also, terms are normally set for longer periods allowing for greater certainty when planning for the future.
Fixed vs. Variable vs. Adjustable:
Fixed, describes an interest rate which will not change over the term of the mortgage. This is a good option when interest rates are low and are expected to rise in the near future. It also gives a first time homeowner time to adjust to any change in budget that making mortgage payments may have caused.
Variable, means that the interest rate being charged is changing based on the interest rate set by the Bank of Canada. This rate fluctuates based on market conditions. Your payments will, with few exceptions, continue to stay the same however the amount you are paying will be distributed to the interest and principal in different amounts. If interest rates rise you will be paying off less of the original borrowed sum as more of your payment goes to interest. The opposite being true should interest rates drop. If you have a fair bit of flexibility in your budget this may be a good option as variable rates over the life of your mortgage often result in lower interest charged.
Adjustable, as with the variable option above, interest rates will change with market conditions however any change in interest rate will result in an increase or decrease in payment. This option should be considered with great care as an increase in rates could results in payments outside you budgetary limits. Amy Wilson, Your mortgage professional can help you decide which option is best for you by talking to you about current market conditions and expectations on future rate changes, as well as the risk you are willing to assume within your personal budget.
Many lenders offer products which will allow you to carry your current mortgage to a new home should you decide to move. The options vary by lender so please consult Amy Wilson if this is something you may be planning in the near future.
Regardless of the type of loan (fixed/variable, term, amortization) most lenders will have guidelines that will allow you t o pre-pay a portion or percentage of your mortgage in advance of the end of the term. Such conditions often include an option to double up a payment or pay an extra 10-20% each year on the amount of principle borrowed. These conditions should be considered with care.