Choosing the right mortgage may seem easy enough. Find the best rate and sign on the dotted line, right?
Unfortunately, it is not that simple. Choosing the right mortgage involves a lot of research and planning. To make the right decision, you need to wade through a variety of mortgage products, all with different rates and terms. It is a complex process. Let’s look at a few of the factors you need to consider when looking for a mortgage.
Fixed or Variable, Open or Closed? All About Mortgage Rates
When you are shopping for mortgages you will hear a lot about fixed and variable and open and closed. Here’s what they mean, in a nutshell:
• Fixed – Your interest rate stays fixed throughout the entire term of your mortgage. This kind of rate makes it easier to plan for the future, since your payments will not change, but if interest rates go down, you could end up paying more.
• Variable – The interest rate varies on the basis of your lender’s prime rate. When interest rates are stable, a variable rate mortgage can cost less than a fixed rate. With a variable rate you can often choose to make fixed payments when interest rates are low, your payment won’t change but you’ll be paying off more of your principal, which is a good thing.
• Open – Open mortgages can be paid off at anytime without penalty, but they tend to have higher rates.
• Closed – Interest rates are generally lower than for open mortgages, but if you decide to pay off a closed mortgage early, there will likely be a penalty.
Are You A Nomad or a Homebody?
Your mobility plays a part in choosing the right mortgage. If you think you will be moving within 5 years, you will need a different kind of mortgage than someone who plans to stay in their home for 10 to 20 years.
Short term stays usually mean short term, open and variable rate mortgages. People planning to stay in their homes for longer periods generally do better with a longer term fixed rate loan, especially if interest rates are low.
A short term mortgage is for two years or less, while a long term mortgage is for three years or more. If you think interest rates are on a downward trend, a short term mortgage might make sense, no matter how long your are planning to stay in your home. When the term is up, you can get a new mortgage for a lower rate. On the other hand, if you are locked into a longer term and interest rates fall, you might be stuck with your higher rate.
How Much is Your Down Payment?
If your down payment is less than 20 of the cost of the home, you will need a high ratio mortgage. High ratio mortgages must be insured, with fees based on the amount of your loan and down payment.
In today’s off the charts housing market, a 20 down payment is rare. High ratio mortgages are the solution, even for people with no down payment.
What to Do Now
How do you feel now about choosing the right mortgage? Confused? Overwhelmed? In need of an aspirin?
Your real estate agent may be able to give you advice, and so might your financial planner. Many people also turn to a mortgage broker to help them find the best rates and terms. The bottom line is that you feel secure in your choice so you can enjoy your new home to the fullest.
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