Choosing The Right Mortgage
For You
by
John Carle & Sharon Gregresh
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 Authors
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.