Once you’ve found the home of your dreams, the next step is to secure a mortgage. A mortgage is a loan meant to assist home buyers in purchasing the house or residential property they desire. Selecting a mortgage needs careful consideration. Mortgages vary when it comes to features and you could get confused with all the different types available if you’re not familiar with them.
Take note of the following so you can select the mortgage that fits you best:
Do you prefer an open or closed mortgage?
An open mortgage gives you more flexibility, but it comes with a higher interest rate. People choose an open mortgage when they want the option to make prepayments. This means that you can, at any time (or when you’re able to earn or save extra money), pay an amount that’s more than the usual. The main advantage here is that you may pay off your mortgage sooner than expected.
The closed mortgage, on the other hand, has a lower interest rate but requires you to pay a relatively fixed amount for the length of your term. You may be allowed prepayments but only up to a certain amount and if you go beyond that, or if you terminate your contract, you will be charged a fee.
What’s your preferred amortization period?
Amortization refers to how many years it will take before you can fully pay off your mortgage. If you choose a longer payment period, your payment per month or week will be lower, but remember that interest rates accumulate over time and you will end up paying more compared to a shorter amortization period.
Would you like a long, short, or convertible term?
Mortgage terms refer to the duration of the mortgage contract. At the end of the term, you will need to renew your mortgage with your lender or you can choose to switch to a different lender.
Opt for the short term mortgage if you think you might move somewhere else in the future, or if you want the chance to consider other lenders. If you’re looking for a loan where you can expect the interest rate to remain steady for many years, choose the long-term mortgage instead. A third alternative is the convertible term, in which some short-term mortgages can be changed to long-term.
Will you choose a fixed or variable interest rate?
The fixed interest rate mortgage has an interest rate that will not change for the duration of your term. However, this rate is typically higher compared to the variable interest rate type. Choosing the variable type means your interest rate will constantly change depending on the market. There’s a chance of acquiring a lower interest rate but you also run the risk of getting a higher one at any time during your term.
How frequently do you wish to pay?
In general, you can choose between paying once a week, once in two weeks, once per month, or twice a month. You decide on this with your lender at the start of your contract. Some lenders will allow you to change to a different schedule.
Are you considering a portable or assumable mortgage?
Mortgages with portability provide homeowners with the advantage of being able to transfer their current mortgage to another home or property. They will still have the same lender, as well as the same contract rates and terms. This is best if you’re thinking of selling your home and purchasing a different one or if you’re moving somewhere else.
The assumable mortgage is for those who wish to acquire another person’s mortgage and property. Ownership of the home and payment for the mortgage will then be transferred to you. It also works the other way around; others can take over your mortgage and home as well.