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Understanding Mortgages

Mortgage Types

There are several different types of mortgages to consider when shopping around. Ultimately, you need to find the right one for your situation. Below are explanations about each type.

Closed

This type of mortgage remains unchanged for whatever term you agree to. Prepayment penalties will apply if you decide to payout, renegotiate, or refinance before the end of term.

  • Provides lower rates than open or convertible mortgages.
  • Often gives you options to make additional payments up to a certain amount without penalty. For example, you may be allowed to make a 20% lump sum each year that goes directly onto the mortgage principal. This is known as a pre-payment privilege.

Open

This type of mortgage may be repaid, in part or in full, at any time during the term without penalty.

  • Provides flexibility until you are ready to lock into a closed term.
  • Allows you to pay off any or all of the mortgage without prepayment costs.

Convertible

This is a mortgage which offers the same security as a closed mortgage, but which can be converted to a longer, closed mortgage at any time without prepayment costs. It is typically associated with fixed rate mortgages.

  • Provides security and flexibility allowing you to convert into a longer closed term mortgage without prepayment costs, if you think rates will rise.
  • Allows you to make an annual prepayment of up to 10% of your original mortgage amount.

Reverse

A reverse mortgage is a product available to homeowners 55 years of age and older that allows them to draw liquid cash from their home without having to move or sell.

Rate Types

Fixed

An interest rate that does not change during the entire mortgage term.

  • You can take advantage of the same interest rate for the entire term with a regular payment that stays the same.
  • You will have the security of knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term.

Variable

An interest rate that can fluctuate during the term. The interest rate varies with changes in market interest rates (typically the bank’s prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes – it depends on the lender and type of product.

  • Historically, variable rates have been lower than fixed rates and could save you more money.
  • If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster.
  • Your regular payment stays the same even if rates change.

Amortization Period

The amortization period on a mortgage is the total length of time it will take to pay off the mortgage.

Terms and Conditions of the Mortgage

Determining the terms and conditions requires some negotiating with the lender. These include:

  • The amount of the mortgage - how much the lender will lend you.
  • The amortization period - how many years it will take to pay the mortgage off in full.
  • The term of the mortgage - the length of time the agreement with the lender is in effect.
  • How often payments will occur.
  • If it's a fixed or variable rate mortgage, and the interest rate on the loan.