All About Mortgages

All About Mortgages

The words ‘my very own home’ carry much emotion. In the life of everyone, the moment you become a homeowner is a significant milestone in your home.

It signifies full independence and completes your metamorphosis into an adult. It is your opportunity to exchange something temporary that’s not even yours for something that’s permanent and that you can call your own.

However, apart from all the emotion and sentimental attachment that’s associated with owning your home, home owning is also a nice financial tool. Regardless of how much money you have at the end of the month for other traditional investments like stocks and bonds, merely paying for the place where you lay your head everyday provides a nice avenue for you to grow your net worth.

As a matter of fact, when used properly, an individual can get his biggest source of wealth from home ownership. Money invested in your mortgage and not withdrawn periodically continues to increase in value over time as the value of the property itself increases. So basically, there’s a chance that in a couple of years, the value of your house could double the price that you originally paid for it. While purchasing a home can provide you with a place to live and an avenue to build your wealth, all the potentials and hopes come at a specific cost. For majority of people, that cost is covered in mortgage.


So what really is mortgage?

Basically, a mortgage is a loan that’s facilitated for the purpose of purchasing a house. A mortgage is given against the value of the home and most mortgages have a run time of 25 years, although the term could be longer or shorter, depending on the contract you enter into with the lender. If a borrower is unable to pay his mortgage at the end of the run time, the lender is free to repossess the home and sell it to get their money back


Very quickly, we’ll be running down through the types of mortgages:

 

Fixed rate mortgage

feature an interest rate that doesn’t change, or is “fixed”, for a set period of time, often between 1 and 5 years. It’s easier to manage a budget with a fixed rate mortgage, since your payments won’t change during that fixed term. The interest rates for fixed mortgages tend to be slightly higher than other types of mortgages where the rate changes; what you gain in stability, you pay for with a higher mortgage interest rate. Fixed rate mortgages are most beneficial when interest rates are low and expected to rise over the length of the term – although predicting rate increases and decreases are far from an exact science. Five-year fixed rate mortgages are one of the most popular mortgage products in Canada.

Adjustable rate mortgage (ARM)

An adjustable rate mortgage (ARM) is reviewed at intervals and then adjusted based on the current prime rate, the rate at which a commercial bank’s optimal customers can borrow money. This rate adjustment affects both the monthly payment as well as the interest rate of the loan. If you have an adjustable rate mortgage and the interest rate drops, then you benefit from the lower mortgage rate instead of being locked into the higher mortgage rate as you would be with a fixed mortgage. The risk, of course, is that if interest rates rise, then you are on the hook for those increase in payments as well. Adjustments can happen without much notice, and as often as eight times per year. Adjustable rate mortgages are beneficial if you can withstand fluctuation in monthly payments but want to take advantage of lower rates.

A variable rate mortgage (VRM)

VRM is another type of mortgage where the interest rate of the loan fluctuates based on the current prime rate. With a VRM, though, your monthly payment remains the same because the fluctuating amount is the amount of the payment that’s applied to the mortgage principal. A VRM allows you to keep some stability in terms of consistent monthly payments, but also reap the benefits if interest rates fall. Rates are typically lower with a VRM than they would be with a fixed rate mortgage.

A convertible mortgage

A convertible Mortgage, one that can move from a variable to a fixed rate, or a shorter to a longer term, at any time without a penalty. If you take advantage of this option, then your interest rate will also change to the current rate offered by the lender for the new term. This would be a good option to consider if you want to stick with a variable rate for the moment, but expect rates to rise.

A hybrid mortgage

also known as a 50/50 mortgage, is a combination of fixed and variable rate mortgages, allowing you to get the best of both worlds. With a hybrid mortgage, part of the loan is financed at a fixed rate and the other part of the loan is financed at a variable rate. The terms for both parts may be different, which may be tricky to manage when it comes time to renew your term, and it also may be difficult to transfer a hybrid mortgage to another lender. Still, you benefit from stability as well as potentially falling rates.

Closed mortgages

Closed Mortgages has restrictions when it comes to being paid off or renegotiated before the specified loan term is complete. Some closed mortgages cannot be paid off before the term ends without paying a large penalty, and other closed mortgages have a prepayment limit, with the borrower incurring severe penalties if any payment over that limit is made.

Open mortgages

are flexible in that you can make lump sum prepayments or accelerated payments without penalty in order to pay the loan before the end of the amortization period. Although open mortgages have greater flexibility, they tend to have slightly higher interest rates than that of a closed mortgage.

Reverse mortgages

Or home equity conversion mortgages, are mortgages that allow you to transform the equity in their home to cash while still living in the property. This has been touted as a good option for homeowners who are nearing retirement and who have considerable equity in their homes if they aren’t planning on moving and need to supplement their retirement income.