Choosing a Mortgage
This is a stressful time when buying your home. You are locking yourself into debt for what feels like a long, long time. There are many choices and every bank would love to have your business. Shop around, you will find there are big differences between them and please, DO NOT JUST GO WITH YOUR CURRENT BANK. You are their best kind of customer because you do not usually question the terms. Most people that look around will probably end up NOT going with their own bank. No one bank is always better either.
There are a few things to consider here.
- Length of the Mortgage Terms
- Amortization Period
- Payment Frequency
- Fixed/Floating/Mixed Interest Rate
- Pre-payment Options
Length of the Mortgage Terms
This is how long you will be in contact with the bank. Common lengths are 6 months, 1 year, 2 years, 3 years, 4 years, 5 years, or 10 years. The longer you lock in with the bank the higher the lending rate will be (you are paying for the security).
Amortization Period
How aggressive will you pay off you mortgage? Typical amortization period is 25 years. This means in 25 years of making your payments (no more or no less) with no change in interest rates, you will have paid back your entire loan plus interest. You can knock this down to 20 or even 15 years if you have the cash flow to do so (your payments increase as your decrease the amortization period). Keep in mind that when you mortgage terms are up you have to renegotiates your terms and interest rates or your own cash flow will have changed by then.
Payment Frequency
Monthly, bi-weekly, or other. This is how often you will make a payment to the mortgage provider. A common trick is to switch to bi-weekly from monthly as you are paying the same amount of money, but you pay less interest so it can knock a few years off your amortization period without actually paying more.
Fixed/Floating/Mixed Interest Rate
The hot topic nowadays. You geta fixed rate which means you will be paying the same interest rate on your mortage for the entire length of you mortgage terms. This give peace of mind and security in case the markets change drastically. You know what payment you will be making 5 years from now. Floating rate changes based on the prime lending rate (typically). As interest rates go up and down so does your rate. These rates are always better than the fixed rates at the time you sign your mortgage, but that can change and that is where you have to have the nerve to go with it. You can save yourself a lot of money.
Mixed interest rates are a combination of the two. It allows you to take on an acceptable level of risk with a floating rate while fixing the remainder of the mortgage.
Pre-payment Options
This is important if you have the cash flow to make use of it. Just paying off your mortgage in the middle of your mortgage terms does not go over so well with the bank (they are out the interest) so there is usually a penalty for doing so. Pre-payment options are avenues the bank has given you to throw extra money down on the mortgage and save yourself the interest. Common ones are the ability to double your payments whenever, put down a percentage of the value of the mortgage every year, increase your payments by a fixed percentage. If you do the math on any of these, they can be a big help and take years off your mortgage.
Go to Canada Mortgage for lots of useful information and calculators for figuring out different values concerning your mortgage.
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