Jarek Bucholc ||Street Smart RE Investing

Types of Mortgages

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Fixed-Rate (Closed) Mortgage

With a fixed-rate mortgage you benefit from the security of locking in your mortgage interest rate for a predetermined length of time, usually ranging from six months to five years. Other terms such as three months, or six, seven and 10 years are also available.

If you think interest rates will increase, you may want to choose a longer term, such as a five-year term. If you think that rates are going to decrease or remain relatively stable for a long period of time, you may want to choose a shorter term.

Most lenders will allow you to make additional payments on your mortgage without any penalty. These could amount to as much as 25 per cent of your original mortgage amount (depending on the institution). However, if you want to pay more than the annual allowable maximum, or pay off the entire mortgage at any time, you will generally have to pay a penalty. Make sure you understand this before choosing your term.


Open Mortgage

An open mortgage allows you to pay off part of your mortgage, or the entire mortgage, at any time without any penalty. Open mortgages usually have a short term, ranging from six months to one year. The interest rate is usually higher than the fixed rate for a closed mortgage with a similar term. One situation where an open mortgage may be appropriate is if your house is for sale and you want to repay the financial institution with the money you get from the sale.


Variable Interest Rate Mortgage

At the start of a variable interest-rate mortgage, the lender will calculate a mortgage payment that includes both the principal and interest. During the term of the mortgage, your payments usually do not change. However, as the base rate for the variable interest-rate mortgage changes, so will the interest rate on your mortgage.

If interest rates drop, less of each payment will go towards paying interest and more will go towards paying off the principal. If interest rates rise, more of your payment will go towards paying interest and less will go to reducing the principal.

Some variable-rate mortgages are completely open (you can pay off all or part of your mortgage at any time, without a penalty). Others may be closed and charge a penalty for paying off all or part of the mortgage.


Convertibility Feature

A mortgage with a convertible feature allows you to renegotiate your interest rate (renew it early) before the maturity date. However, not all lending institutions offer a convertibility feature. With a convertible rate mortgage, you can lock into a longer term during the current term of your mortgage without paying a penalty – but only if you stay with the same lender. For example, if after a couple of months you see that interest rates are going to increase, you may change to a longer-term mortgage such as a five-year term. The convertibility feature is often on variable interest-rate mortgages or fixed-rate mortgages with short terms.


Adjustable Rate Mortgage

An adjustable-rate mortgage is a mortgage where the interest rate and payment amount are adjustable from time to time during the term.


Source: FCAC - ACFC
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