Demystifying Mortgages | Suite101.com

Mortgage documents are difficult to decipher, and many people overlook the various options in their financing package. This article helps demystify some of your options.

When shopping for a mortgage, you need to prioritize your goals and needs, and establish the features that you want in your financing package. Your mortgage can be customized for your personal circumstances with an array of options. Sifting through all of the choices can be confusing, so here are some simple comparisons and explanations to assist you.

Open vs. Closed

With an open mortgage you can pay off as much of your debt as you wish, whenever you want, without being charged a pre-payment fee. A closed mortgage you get a more favorable interest rate for agreeing to keep the mortgage for the full fixed term. All mortgages are fully open at the end of their term. This allows you to pay all or part of your outstanding principal without incurring any prepayment fee on the maturity date.

Fixed Rate vs. Variable Rate

A fixed rate mortgage carries a set interest rate for a specific period of time. The interest rate is set for the duration of the loan period and doesn't fluctuate with interest rates. The regular payment of interest and principal remains the same throughout the term. The benefit of this option is that you are protected from changing interest rates.

With a variable or floating rate mortgage, the interest rate rises and falls with changes in the mortgage market place. Generally payments remain constant throughout the duration of the term. When interest rates drop then more money is applied to your principal. If rates rise dramatically, your regular payment may not cover all of the interest owing.

Short Term vs. Long Term

You can choose the term of your mortgage. Terms range from six months to 5 years, some lenders do offer longer terms up to 25 years.

A short mortgage is typically two years or less, whereas a long term mortgage is usually 3 or more years. The longer the term, usually the higher the interest rate. The benefit of a long term mortgage is that there is the security of knowing what your interest rate and payments are for an extended period of time. In contrast, the shorter the term, the lower the interest rate you generally pay.

No matter how you choose to configure your next mortgage, make sure that you take the time to consider all possible alternatives, in order to arrange financing to best suit your needs.

The copyright of the article Demystifying Mortgages in Buying/Selling a Home is owned by Joel Nash. Permission to republish Demystifying Mortgages in print or online must be granted by the author in writing.

May 12, 2006 7:39 AM

Barbara Bell :

A 30-year fixed-rate mortgage is most common in the United States, I believe. The interest rate is not as low as a variable (ARM) mortgage but generally works out to be favorable over the long term. It can be refinanced, generally, if rates go more than 1 1/4% lower during the term of the mortgage.

Is this different from typical mortgages in Canada, Joel?

Jun 3, 2006 6:10 PM

Joel Nash :

Yes in the Canadian market place the amortization period is 25 years or less. This is because most mortgages are insured high ratio mortgages. This simply means that the lender is providing more than 75 percent of the principal to purchase the home.
There are generally two companies in Canada the insure mortgages, the Canadian Mortgage and Housing Corporation or CMHC and G E Capital.
Now as for variable verses fixed that is a matter of opinion. Variable rates tend to be lower than locking in for a fixed term. However you may have to suffer through some unnerving interest rate swings. This personally more than I wish to have to deal and I tend to lean towards a fixed term interest rate to avoid fluxuations in the mortgage rates.