Types of Mortgages

Open Mortgages

If you want to make large payments on your mortgage or pay off the entire mortgage without penalty, then an open mortgage is for you. An open mortgage offers maximum flexibility. These homeowners are willing to accept some fluctuation in the interest rate for the flexibility of paying off the entire mortgage before the term is complete.

It is important to keep in mind that most regular mortgages will allow homeowners to make lump sum payments of up to 20% of the entire mortgage once a year without penalty. These are often called privilege payments. That payment goes directly towards paying down the principal of the amount borrowed. You may therefore not need an open mortgage, with higher interest rates, to make additional payments.

Closed Mortgages

A closed mortgage is a commitment with a pre-determined interest rate, over a pre-determined period of time. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is fully paid before the end of the closed term.

Most closed mortgages will allow the borrower to prepay up to 20% of the original mortgage amount without penalty each year. This payment goes directly toward paying down the principal of the amount owing.

Fixed Rate Mortgage

When you agree to a fixed rate mortgage, your interest rate will never change throughout the term of your mortgage. There are no surprises as you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term. Fixed rates are usually preferred by first time buyers and those borrowers looking for payment stability.

Variable Rate Mortgage

When you agree to a fluctuating interest rate for the length of the term, then you have a variable rate mortgage. Interest rates fluctuate with the bank’s prime lending rate, and may vary from month to month. When interest rate change, your payment amount could remain the same, however the amount that is applied to the principal will change. For example, if interest rates drop, more of your mortgage payment is applied to the principal balance owing. The variable rate mortgage is a good option for homeowners who believe that interest rates are currently high and will drop. Variable rate mortgages are usually suited for borrowers with larger amounts of equity and those that are more willing to take on the risk of interest rate fluctuations.

Convertible Mortgages

A convertible mortgage is an agreement made at the beginning of a term that allows homeowners to change the type of mortgage they hold during its term. A variable mortgage for example, can usually be converted to a fixed rate mortgage at any time.

Reverse Mortgages

This type of mortgage allows older consumers to convert their home equity into monthly cash payment(s), generally for living expenses. A homeowner’s equity is gradually drawn down by a series of monthly payments from the lender to the homeowner – the borrower. At the end of the loan period or upon the death of the borrower, the loan balance is due, which is usually settled by the heirs who sell the property to meet the outstanding obligation.

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