What Type of Mortgage Should You Choose?
posted in Mortgage News
Buying a home, whether it’s your first, second, third or fourth can be an exciting time, but it’s easy to get carried away in your search for a dream home, without having a sound understanding of your financial constraints.
Before buying a home, you’ll need to think about whether you can keep a lender happy by paying your mortgage, taxes and utilities without leaving yourself short every month, and your total monthly housing costs should not be above 40% of your household’s total gross income. Once you’re in a position to honor all of your monthly outgoings and still have enough money left over to live on, you can begin thinking about some of the following factors that will influence the type of mortgage you choose:
Your down payment
You could reduce your mortgage with a big down payment, but if you don’t have the funds available to do this, you might want to choose a high-ratio mortgage.
What else should you think about when choosing a mortgage?
You’ll want to discuss the below options with your lender or mortgage broker:
- Fixed or variable interest rate
- Amortization period
- Length of term
- Open or closed
What to expect when choosing a variable interest rate mortgage?
If there are only minor increases in the variable interest rate, there’s a chance your monthly payments will remain the same, but the amount going to pay the interest portion will increase. That said, if rates go up significantly, your lender may increase your monthly payments.
Be sure to discuss this option in detail with the lender or a mortgage broker before making your final decision.
What are the most common mortgage terms?
Ranging from 6 months to 10 years, the interest rate of mortgage terms typically rises in accordance with the terms length.
Are there any advantages of open mortgages?
Generally closed, fixed-rate mortgages allow for annual lump sum pre-payments up to 20% of the original mortgage, but it will vary from lender to lender. There may also be the opportunity to increase the amount you pay each month, which can be useful for people whose income is increasing exponentially.
While it can be tempting to get your mortgage paid off, or break it up to get a better rate, there are often fines associated with this, while open mortgages offered by some lenders may have a significantly higher rate of interest.
Should you choose a long or short amortization period?
To get your mortgage paid off quicker, a shorter amortization period can be helpful, but Canadians can negotiate a mortgage of up to 30 years, which is popular with first-time buyers because of the lower mortgage payments each month. Be warned though, the temptingly low payments may come with higher interest rate costs.
What are accelerated payments?
By paying your lender weekly, bi-weekly or monthly, you can pay less interest over the life of you mortgage with the same interest rate, or with accelerated payments, you can take time off your total amortization period. These payments can help you pay your mortgage off quicker by increasing the total payments you make each year, even though you don’t save much interest.
For a more in-depth lowdown on mortgages and advice on how to choose the best one for you, talk to a local mortgage broker, who will have all the insider knowledge to answer your questions.