Are you unsure on an open or closed mortgage, or if a fixed or variable is right for you. The information below should help break down each type of mortgage loan. We are still just a phone call away to chat with a mortgage broker. We are your trusted Grande Prairie Mortgage Experts!
Open vs. Closed
An open mortgage is 100% open for prepayment at any time throughout the term of the loan. This means that you have the option to repay any or all of the mortgage balance at any time without penalty. They come with higher interest rates to allow these prepayment options but have the ease of paying them out in full without a penalty. This type of mortgage may be important to you if you can foresee repaying your mortgage loan in the near term. For example, you may be planning to sell your home within the term of the mortgage and paying it out in full, or you may be expecting other money that will allow you to make large prepayments to mortgage loan.
A closed mortgage has restrictions on how much of the principal you can repay without penalty within the term of the loan. Most closed mortgages will allow you to repay a certain portion of the principal amount every year without penalty. The amount you can prepay depends on the lender but usually ranges from 10% to 25% of the original principal amount per year. There may be restrictions on when these prepayments can occur and how many times per year you can make a prepayment. For example, you may be able to only make prepayments once throughout the year on the anniversary date of the mortgage or the prepayment may need to coincide with a payment date. Your mortgage professional will discuss these policies with you as each institution’s policies can vary widely.
Fixed rate vs. Variable Rate
A fixed rate mortgage is where the interest rate is set at the time you get your mortgage loan and will not change for the entire term of the loan. For example, if you take out a 5-year term, fixed rate mortgage at 4.05% you know that your rate is fixed at 4.05% for five years and will not change. This type of mortgage offers you security and peace of mind, as you know exactly what the interest rate and payments will be. You will generally pay a little higher interest rate for a fixed rate mortgage and the rate usually increases with the length of the term. Fixed rate mortgages if broken prior to your term, paid out more then the prepayment allows, will have bigger penalties then if in a variable as it is calculated off the interest rate differential and the spread. For example big banks have posted so they would use the posted rate to calculate the penalty. 5 yr posted 4.99 – 3 yr posted 3.64 = 1.35 spread over 500,000 outstanding balance 6750 a year paid out 3 years early is a 20,250 penalty.
A variable rate mortgage is a mortgage where the interest rate is tied to and floats with the bank’s prime rate. If the prime rate goes up, then your rate goes up. If the prime rate goes down, then your rate goes down. Variable rate mortgages usually offer the lowest available rate because you are taking the risk that rates may rise. Variable mortgages only hold 3 month interest penalty so alot lower then the fixed rate penalty noted above.
There are many different options available for variable rate mortgages. Your mortgage professional will help you review all of your options. Call Jodi today to get started on your Grande Prairie Mortgage! I will explain all the lender and products and let you pick the best for your needs. We are your trusted Grande Prairie Mortgage Brokers at Whalen Mortgages. Informed decisions result in the best outcome, something that works for you!
The Mortgage Term
The term of the mortgage is the contractual life of your mortgage loan also with the specified lender. The term represents the length of time that you and the financial institution are obligated to each other with respect to your mortgage. As you choose your mortgage, the term is one of the decisions you will need to make. The term of the mortgage is usually shorter than the actual life, or amortization of your mortgage. Once the term has expired, the mortgage is completely open for renegotiation. At that time, you have the right to find a new lender if you wish and your financial institution has the right to re-qualify you before renewing your mortgage. In practice, as long as your mortgage is current and all payments have been made as agreed, financial institutions will often automatically renew your mortgage, and not require that you re-qualify.
Short Term vs. Long Term
A short term mortgage is usually for three years or less. Short term mortgages are appropriate if you believe interest rates will be lower at renewal time. A long term mortgage is generally for three years or more. Long term mortgages are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. This is often important for first time homebuyers. The key in choosing between short and long term is to feel comfortable with your mortgage payments.
Most lenders allow several options for payment frequency (how often you make your mortgage payments). Most will allow you to make payments either weekly, bi-weekly (every two weeks), semi-monthly (twice a month) or monthly. Choosing which type of payment to make will be a matter of convenience, but there may be advantages to paying more frequently than monthly. When you increase the payment frequency, you reduce the principal faster, pay less interest and pay off the mortgage sooner. Contact Grande Prairie Mortgage Specialist Jodi at Whalen Mortgages to discuss the options that will work best for you.