How to Determine Which Type of Mortgage to Get
Your mortgage is probably going to be the biggest loan you ever take out. It makes purchasing a new home affordable, but you ultimately end up paying tens or even hundreds of thousands of dollars in interest over the years. That’s why it’s so important to know all you can about mortgages, to find the right one for your needs.
Fortunately, with a bit of knowledge and the right mortgage lender at your side, the choice becomes easy. Take a look at some of these common types of mortgages to help you decide which style is right for you.
Traditional vs. High-Ratio Mortgages
Traditional mortgages are for those who have a 20 percent down payment, while high-ratio mortgages are for those who have lower down payments. Those with high-ratio mortgages have to pay for mortgage insurance. This gets added to the monthly payment and protects the bank in case you default on the loan. Some banks require those who have traditional mortgages to also carry mortgage insurance, though it’s not always required.
Since these different types are based solely on how much of a down payment you have, you don’t always have a choice as to which type of mortgage you can get. However, if you’re close to having a 20 percent down payment, it may be more favourable to keep saving until you have more than 20 percent. You might get better loan terms with a traditional mortgage.
Open vs. Closed Mortgages
Open mortgages allow you to make any type of extra lump sum payment you like, while closed mortgages have penalties for early payoffs. Open mortgages work well for people who want to apply an annual bonus to their mortgage once a year or who may want to pay the mortgage off early after an inheritance or selling the home. Closed mortgages might have slightly lower interest rates, but it’s difficult to pay them off early. They’re a good choice for those who know they’ll stay in their home for many years.
Fixed Rate vs. Variable Rate Mortgages
Fixed rate mortgages have the same interest rate throughout the terms of the loan. They appeal to those who want to know what their mortgage payment will be at all times. This makes it easier to budget, so fixed rate mortgages are one of the most popular choices.
Variable rate mortgages tend to start with a lower interest rate for a certain period of time, but that interest rate can then change based on market conditions. This increase in interest rate could potentially increase a person’s monthly payment by hundreds of dollars. These mortgages work well for those who plan to be in the home for a short period of time and those who don’t mind taking on a little risk. It’s important to note, though, that those who apply for a variable rate mortgage should be able to afford a payment that’s significantly higher or be ready to refinance as soon as rates increase.
Other Types of Mortgages
There are a few other kinds of mortgages that might fit your needs. These types are somewhat less common but still deserve a mention.
Portable mortgage: You can take a portable mortgage with you when you buy a new home. If you need more money for the new home, it gets combined with the portable mortgage. This type works well for people who want to lock in their mortgage rate but may have to move in the near future. With a portable mortgage, they don’t have to worry about prepayment penalties.
- Convertible mortgage: These are similar to variable rate mortgages, but you have the option of changing the type of mortgage when rates change. For example, with a variable rate mortgage, you’re stuck with fluctuating interest rates for the term of the loan. The convertible mortgage allows you to take advantage of lower rates, but then convert it to the safer fixed option if interest rates start rising.
- Capped rate mortgage: This is a variation of a variable rate mortgage. The rate can change, but you never have to worry that the rate will go too high.
- Reverse mortgage: Primarily intended as a way for retired couples to take advantage of the equity in their home. This is an option for those who have a lot of equity in their home and don’t want to move.
As you look at the types of mortgages, it’s important to note that some of these types of mortgages work together. For instance, a fixed rate mortgage can either be open or closed; it could be traditional or high ratio; it could be portable or non-portable. Your mortgage lender can go over all of the details of your mortgage so you understand the differences.
Most people who plan to live in their home for many years choose to get a traditional or high-ratio fixed rate mortgage because it’s the safest option. Interest rates might be slightly higher, but you don’t have to withstand the risk. However, it’s important to make a decision that works well for your family. This is a huge reason to talk to a lender before house hunting. Explore all of your options and ask any questions you might have.
