Types Of Mortgages

In recent years financial institutions have responded to consumer demand for increased mortgage financing options by designing many different types of products with a variety of pricing alternatives and terms.

Homebuyers and homeowners have never had more alternatives; however these options have also never been more complex. Here are some of the options you will be considering:

Closed Mortgages

Most mortgages are “closed” meaning that you have a guaranteed interest rate for a specified period of time and you have an “agreement” with the lender to keep the mortgage for that period of time. If you should choose to pay out the mortgage early you will be subject to paying a penalty for breaking that contract. The mortgage document will allow provisions to avoid this penalty if you have the mortgage assumed by the new purchaser of your home or if you port the mortgage to your next home.

Most closed mortgages do have pre-payment options attached to the mortgage that allow you to pay down the mortgage faster, you may pay 10-20% of the mortgage principal off each year without penalty.

In some cases the mortgage rate may fluctuate but the mortgage is still closed for a specified period of time such as most “Variable Rate” mortgages. Closed mortgages are available in 6 months, 1,2,3,4,5,7,10, and at times 25year terms.

Cash Back Options

These mortgages will typically be priced at the bank posted rate. The lender will pay you between 3-5% of the original mortgage balance on the day of funding the mortgage. These mortgages do serve a purpose for some individuals, but it is typically in your best interest to seek out the lowest rate as the overall savings is much greater.

Open Mortgages

Open mortgages are open to any prepayment at any time without penalty. They are usually stated as a 6-month or 1 year term, where the interest rate is guaranteed for that time period. Open mortgages will generally have a higher interest rate attached to it because of this added flexibility. Unless you plan to pay your mortgage off in that specified period of time it is usually more cost effective to take a closed mortgage.

Secured Line of Credit

Often it is your best interest to obtain a secured line of credit instead of an open mortgage. These products should be priced at “prime” and are fully open for pay down without a penalty. You will be restricted to a maximum loan amount of 80% of purchase price or appraised value, however. Depending on the lender your minimum payment will range from interest only to 3% of the outstanding amount.

Convertible Mortgages

Convertible mortgages allow you to play the short term market while at the same time having the ability to react to any market condition by “locking in” to a longer term should you feel that the interest rates are going to go up. Some convertible mortgages will have restrictions as to which term you must convert into. Although you may convert into a longer term without penalty you are not guaranteed the lowest rate. It is advisable to talk to your mortgage broker to discuss which option is best suited for your needs.

Variable Rate Mortgages

These mortgages typically fluctuate with the bank prime rate. Some variable rate products will actually be locked in for 3 years and the interest rate will fluctuate daily or monthly, while others will fluctuate every 3 months. Variable rate products are best suited in times where the interest rates are stable to declining. These products have become increasingly popular in the last few years. It can be difficult in assessing one product from another, unless you fully understand the slight nuances between the various options. When making an assessment you must look at the way they are compounded, the interest rate itself, and what rate are you likely to lock into.