Types of Mortgages
Mortgages come in a variety of different shapes and sizes, and it can be hard to figure out what types of mortgages are right for you. It can certainly get confusing trying to differentiate between an open or closed mortgage, a high-ratio or conventional mortgage, and a fixed-rate or variable-rate mortgage.
A Mortgage broker can help you get the best type of mortgage for your individual situation, but it’s always a good idea to have some knowledge of your own. So, if you’ve ever asked yourself, “What type of mortgage do I need,” then just continue reading to find out more.
Fixed Mortgage Rate and Variable Mortgage Rate
Fixed mortgage rates and variable mortgage rates deal with the interest rate percentage on a given loan. There’s also another less common type of mortgage that also deals with interest rates: adjustable mortgage rates. These three kinds of mortgages each have their own distinct differences.
- Fixed-rate – As the name suggests, interest rates with this type of loan are fixed. That is to say, if you start with a 4.1% interest rate, you will maintain that 4.1% interest rate throughout the duration of the mortgage. Monthly payments may vary, but you will always pay the same total amount regardless.
- Variable-rate – With this type of mortgage, the interest rate adjusts itself depending on the market rate. If the market rate is high, your interest rate will also be high. If it’s low, your interest rate will be low. You may be able to pay off the loan earlier or later and at a greater or smaller cost depending on market rate variations.
- Adjustable-rate – With an adjustable rate, both the monthly payment and the interest rate can fluctuate based on market conditions.
None of these is universally better than the other, but you can always consult a mortgage broker to find out what’s right for you.
Open versus Closed Mortgages
Open and closed mortgages have a lot of major differences. But they also have some similarities. For instance, they can both be either fixed-rate or variable-rate mortgages. They both deal with how the mortgage actually gets paid.
Open mortgages allow you to make extra payments and to pay off loans early without a penalty. They usually last between 6 months and 5 years. Open mortgages offer more flexibility than closed mortgages when it comes to paying your installments.
Closed mortgages, by contrast, prohibit consumers from paying offer their loans early without incurring a penalty. But, they general come with lower interest rates than open mortgages. There’s also a lot more stability to these rigid types of mortgages.
High-Ratio versus Conventional Mortgages
These mortgages refer to the percentage of the money borrowed minus the down payment. A conventional mortgage usually requires a 20% down payment, meaning that you’ll borrow 80% of the original principal. This is referred to as a “conventional” mortgage because a 20% down payment has long been a rule of thumb. Many people, however, do not have a 20% down payment to offer.
In that case, they may opt for a high-ratio mortgage. This essentially means that they will pay a smaller percentage of the down payment in return for borrowing a larger percentage of the principal. The lowest down payment that’s legally allowed is 5%, meaning that you can borrow as much as 95% of the principal.
So, if you’re wondering how to choose a mortgage that best fits your need, you may still need to take the advice of mortgage broker. But, at least you now have a basic understanding of all the different types of mortgages available, and how they may affect the home buying process.
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