Grande Prairie Mortgage Solutions
Are you trying to determine whether an open or closed mortgage is right for you? Are you uncertain whether a fixed rate or variable rate mortgage is the best choice? Don’t risk making a costly mistake. Talk to a Grande Prairie mortgage broker at Grande Prairie Whalen Mortgages to break down each type of mortgage and help you determine which mortgage product is right for you.
Open vs. Closed Mortgages
An open mortgage is one that is completely open for prepayment at any point in the loan term. This means you can make an extra principal payment at any point without penalty. You could even pay off the entire mortgage balance without penalty. However, this flexibility comes at a cost. Lenders charge a higher interest rate to offset the potentially interest payments over the life of the loan. An open mortgage is a good choice if you think you can pay off the loan well before the mortgage term. For example, you would do better with an open mortgage if you may sell the home in a few months, paying off the current mortgage with the proceeds of the sale. If you will have the mortgage for more than a few months a variable rate mortgage offers way lower mortgage rates with only 3 months interest penalty when you pay it out. Call Grande Prairie Whalen Mortgages to run the numbers and see which a better option is.
A closed mortgage is one with restrictions on how much principal you can pay without penalty. This doesn’t mean you cannot make extra principal payments. Most closed mortgages permit a certain amount of principal paid against the loan. That limit is anywhere between 10% and 20% of the original principal amount. You may be limited in when you can make these extra principal payments. For example, they may only let you make principal prepayments on the anniversary date of the mortgage. Or the mortgage prepayment can only be made along with scheduled mortgage payments. A Grande Prairie mortgage professional can explain the policies each lender has and help you find a mortgage product that fits your situation.
Fixed rate vs. Variable Rate
A fixed rate mortgage has a “fixed” interest rate. If you take a fixed rate mortgage with a five year term and a 3% interest rate, that interest rate remains at 3% for the first five years of the mortgage. It doesn’t matter if interest rates rise – you will be paying the same mortgage payment unless you refinance the mortgage. The risk you’re taking is that interest rates may fall, and then you’re paying more than you’d have to. Fixed rate mortgages provide peace of mind. You know what you’re going to pay month after month.
If you break your fixed rate mortgage, whether you refinance the loan or sell the house, you’ll need to pay a prepayment penalty based on the interest rate you were paying and the time left on the mortgage. Variable rates charge a penalty if you break the loan, too, but this is typically a three month interest penalty regardless of how far you are into the loan term. Variable rate mortgages are very transparent for penalty purposes.
The penalties for breaking a fixed rate can be steep, and they’re not always easy to calculate.
Big banks have posted interest rates, so they would use the posted rate to calculate the penalty.
5 yr posted rate or 4.99% versus a 3 year posted rate of 3.64% interest rate equals a 1.35% spread. If you have a $500,000 outstanding balance, this equals $6750 a year in interest you have to pay for. However, that’s per year left on the loan. Therefore, if you break the mortgage three years early, what you really pay is a $20,250 penalty.
A variable rate mortgage varies based on the bank’s prime rate. When the prime interest rate goes up, the interest rate on your loan goes up. When interest rates go down, your interest rate goes down, too. Borrowers tend to get the lowest interest rates with variable rate mortgages, because lenders know you’ll have to pay more when interest rates rise. You can always jump to a fixed rate mortgage for a variable rate mortgage for the remaining term with no penalty. So there is peace of mind knowing you have an exit strategy if rates go up.
There are many options available when it comes to variable rate mortgages. Call Jodi and her team your Grande Prairie mortgage experts at Whalen Mortgages Grande Prairie today to get started on your Grande Prairie mortgage. We’ll take the time to explain the options to you and help you make an informed decision. We’ll find something that works for you.
The Mortgage Term
The mortgage term is the contractual life of the mortgage. Lenders offer a variety of mortgage terms. The mortgage length is usually shorter than the actual life or amortization of the mortgage. When the mortgage term has expired, you can renegotiate the terms with your current mortgage lender or any other lender or bank for that matter, call us to let us get you the lowest rate. In theory, the lender can re-qualify you, but as long as you’re making your payments on time, they’ll typically continue the business relationship as-is. You have at that point the right to find a new lender, as well. Contact Whalen Mortgages to learn what mortgage rate you qualify for with one of our partners.
Short Term vs. Long Term
A short-term mortgage is defined as one lasting three years or less. Short-term mortgages are a good choice if you think interest rates will fall over the next few years, but you don’t want the uncertainty of a variable rate mortgage. A long-term mortgage is defined as lasting three years or more. They’re the best choice for locking in today’s low interest rates. In either case, you need to make the choice that ensures you can afford to make your mortgage payments.
Most mortgage lenders give you several options on how often you pay the mortgage. The most common options are weekly, bi-weekly, semi-monthly (twice a month) or monthly mortgage payments. Bi-weekly payments will require you to pay 26 house payments a year, while semi-monthly mortgages require 24 house payments a year. Thus a biweekly mortgage means there will be two months a year where you’re hit with three mortgage payments.
A bi-weekly payment only saves you money if you make the same payment as a semi-monthly payment but end up paying the equivalent of one more monthly mortgage payment a year this is called accelerated bi-weekly.
More frequent payments can help you reduce the principal faster, in theory paying less interest over the life of the loan. However, the loan term and interest rate also affect this equation. Contact Grande Prairie mortgage specialist Jodi Whalen with Whalen Mortgages Grande Prairie to determine which mortgage is the best deal for you. Call 780-357-3993 to speak to Jodi or one of her experienced team members today.