It can be hard to figure out how to choose the right mortgage for you. In this article we’ll help by discussing 5 common types of mortgages, including: variable rate mortgage (VRM) / adjustable rate mortgage (ARM), open mortgage, closed mortgage, conventional mortgage, and high ratio mortgage.
Below are some common types of mortgages:
Variable Rate Mortgage (VRM) / Adjustable Rate Mortgage (ARM)
These types of loans differ from a fixed rate mortgage in that the mortgage rate may be changed during the term of the mortgage. Generally, these mortgages are initially set up like a standard loan, based on the current interest rate. The mortgage is reviewed at specified intervals and if the market interest rate has changed, either changing the size of the payment or the length of the amortization period (or a combination of both), the lender then alters the mortgage repayment plan. Source: mortgagebrokersOttawa.com
An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages are available in shorter terms, 6 months or 1 year only, and the interest rate is higher than closed mortgages as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or if you are expecting to pay off the whole mortgage from the sale of another property, or an inheritance (that would be nice). Source: CalumRoss.com
Closed term mortgages are usually the better choice if you’re not planning to pay off your mortgage in the short term. Interest rates for closed term mortgages are generally lower than for open term mortgages. Closed term mortgages offer you the ability to save on interest costs and payoff your mortgage faster. You will pay a prepayment charge if you wish to renegotiate your interest rate, prepay more than your mortgage allows or pay off your mortgage balance prior to the end of its term. Source: RBCRoyalBank.com
If your down payment is greater than 20% of the purchase price or valuation of the property, you may qualify for a conventional mortgage. That means you are not required to pay for mortgage default insurance. Source: TDCanadaTrust.com
High Ratio Mortgage
This type of mortgage allows you to borrow more than 80% of the property’s purchase price (or the appraised value, whichever is less). However, to take advantage of this option you will need to pay for mortgage loan default insurance. This insurance is actually legally required by your lender, but the lender passes on the cost to you. While it’s on a sliding scale—the more you put down, the fewer fees you’re charged—it’s still not cheap, but it does give potential home-owners that have less than a 20% down payment access to the market. Source: MoneySense.ca
Now that you know the different types of mortgages, it’s time to choose a good mortgage broker for you. If you have any questions or need further assistance, please give us a call or contact us here.
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