Listening to people talk about the various types of mortgages, especially in the variable range of products, can confuse the best of us. As complex as they may seem, there is a product that is just right for you. Here are some of the most common mortgage types:
Open Mortgages: 6 months – 1 year
An open mortgage is one without rules or penalties. You can purchase a home in January and sell it in March. Your repayment schedule is not restricted either. You may make a payment as large as you wish without consequences for breaking a term. However, unlike other mortgages, you will be subject to higher rates and typically shorter terms.
Closed or Fixed Mortgages: 3 months – 25 years
Though the term “closed mortgage” is still widely used, the word “fixed” is seen more often these days as it refers primarily to your interest rate not changing over the term of your mortgage. The rates for fixed mortgages are slightly lower than open ones for the same term. If signs point to interest rates rising in the near future, you could opt into a longer term, which could outlast the period of higher rates.
All major lending institutions offer different options to accelerate paying off your fixed or closed mortgage. It is even possible to pay off closed mortgages prior to the end of your term, although lenders do charge penalties for doing so.
Variable or ARM (Adjustable Rate Mortgage): 3 years – 10 years
With more than fifteen distinct products in this category alone, one can see why comparing one to another might be confusing. Not too worry – your broker knows the way through this maze and ultimately to the product that is perfect for you. Variable mortgages come with very specific sets of rules. Depending on what mortgage product you choose, there will most likely be certain discounts and benefits associated with your choice. One popular feature is one that you can choose to lock in your mortgage from variable to fixed at any time.
Capped Rate Mortgages: 3 months – 25 years
A capped rate mortgage is the same as a variable rate product with one exception. Your rate will still fluctuate with the prime-lending rate, however you will not pay more than a set limit set by the lender. A capped rate mortgage will often have penalties for early repayment of the full loan before the term ends.
This type of product is usually set for shorter terms. A convertible mortgage is best when interest rates climb a great deal unexpectedly. The main advantage is that you have the option to extend your term, thus making the change in interest rate more manageable. No penalties are applied when you choose to lengthen your term but you must use the same lender.
A reverse mortgage is exclusive to Ontario and British Columbia and is applicable to people who are at least 62 years of age. What this mortgage type allows a homeowner to do is convert the equity in their homes to income without selling their property or making monthly payments. The loan is repaid after death by the sale of the home. One aspect of this type of loan is that the interest accrued is calculated on the amount borrowed. By the time the house is sold, it could mean that most of the proceeds of the sale go back to paying off the loan and leaving little for surviving family. There are other variations to a reverse mortgage that can be further discussed with your broker.
These are only some of the various mortgage types available to you. Let Ray Silvestri help you find a mortgage that is a perfect fit for you and your circumstances while making the experience simple and understandable. Call today.