What Kinds of Mortgages Are Available?

Deciding on the right kind of mortgage requires knowing what is out there. With this information, potential home buyers will understand the differences between several popular types of mortgage loans.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Amortization and Loan Terms

Sometimes, people can get the amortization schedule of the loan confused with the loan term, particularly if they are new to the process. Loan amortization refers to the amount of time a set payment of principal would need to be paid in order to completely pay off the loan. The loan term may be the same amount of time, or it could be shorter. While the loan might take as long as 25 years to fully amortize, the loan term often ranges from 6 months to 10 years. Borrowers may need to renew the loan for several terms before they pay it off.

Conventional vs High Ratio Mortgages

The standard mortgage typically involves a 20 percent down payment from the home buyer. However, in areas with a higher cost of housing, saving up 20 percent of the sale price can be difficult for first-time home buyers. As a result, lenders may choose to offer loans with a down payment of 5 percent, depending on the applicant's creditworthiness and the price of the home. These loans are called “high ratio mortgages,” and usually require mortgage default insurance. This insurance protects the lender if the borrower stops making payments, and is paid for by the person getting the loan. Mortgage default insurance might be paid all at once at closing, or as a monthly premium.

Variable Rate or Capped Rate Loans

People who apply for mortgages may need to choose between loans with a capped interest rate, and those with a variable rate. Fixed interest rate mortgages keep the same interest rate for the duration of the term, however long it is. Variable rate loans usually start at a lower average rate than capped rate mortgages. However, with a variable rate, the interest charges could go up or down periodically throughout the term. Depending on the payment plan, people who have mortgages with a variable rate might end up paying a lot more if rates go up. As such, they should consider the benefit of opting for variable rate at the beginning, and be sure that they can accommodate a higher payment later if necessary.

Fixed Payment and Adjustable Payment

Whether people have the same payment every month, or a different payment based on the interest rate, relates to the payment schedule they choose. Some home buyers want the convenience of a predictable payment every month, even if they have a variable interest rate. A fixed payment ensures that the borrower pays the same amount every month. Adjustable payments only apply to people with variable interest rate loans. With an adjustable payment schedule, people may pay more or less as the interest rate on the loan fluctuates. In either case, the payment of principal and interest is designed to keep up with the amortization of the loan.

Closed vs Open Mortgage Loans

Deciding how much to pay on a loan may dictate whether a buyer should pick an open or a closed loan. With a closed loan, the interest rate is often lower. However, closed loans restrict certain types of prepayment. This may include extra payments toward the principal on the loan, or early refinancing or repayment of the loan. Closed loans often carry prepayment penalties. People who think they will want to put more money toward principal, or renegotiate the loan before the end of the term, might consider paying a higher interest rate in exchange for an open mortgage.

Short Term or Long Term Mortgages

The features of the loan that a borrower selects only apply to the term of the loan. This means that people might choose a variable rate loan for a shorter term, with the intent of negotiating a capped rate mortgage for the next term. People should carefully analyse the advantages of selecting specific loan terms before making a decision. A shorter term might offer home buyers the flexibility of negotiating a better loan more quickly. Conversely, buyers who believe they are getting the best options at first may prefer to select a longer term, to ensure they can keep those aspects as long as possible.

Choosing the right kind of loan can be complicated, especially for Malahat North home buyers who have a lot of options. By considering all of these possible loan types, buyers can select the loan that will work optimally for them.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.