In this day and age the banks and other financial institutions offer a variety of different mortgages to the home buyer. The interest rates are just one consideration. You should also look at whether the mortgage is open or closed, the term of the mortgage, whether the interest rate is variable, and the length of the amortization period, among other things. To help you consider the options, the following is a list of terms commonly used in mortgage descriptions:
Principal: Reference to the Principal is a reference to the total amount borrowed, or still owing on the mortgage not including interest.
Open Mortgage: If a mortgage is open, the principal and the interest can be paid by you the homeowner at any time without facing any penalties. Lump sum payments can also be made during the term or life of the mortgage without incurring any additional charges.
Closed Mortgage: This is the opposite of an open mortgage. If the mortgage is paid out prior to the end of the term of the mortgage, the homeowner will likely be required to pay a penalty. The amount of the penalty will vary depending on the mortgage company you are dealing with. The details of how any penalties will be calculated must be disclosed to the homeowner before the monies are advanced by the mortgage company.
Term: The term refers to the length of the agreement between you and the bank. The mortgage will in all likelihood not be paid in full during the term of the mortgage, but the agreement (that sets out the interest rate; penalties; open or closed) will expire at the end of the term. At the end of the term, you can either payout the balance due under the mortgage or renew the mortgage for an additional term. Mortgages are generally offered at 6 month, 1, 2, 3, 4,and 5 year terms.
Amortization period – The length of the amortization period is the length of time it will take to payout the entire mortgage.
Variable rate – The interest in this type of mortgage will fluctuate with the changes in the prime rates of mortgages offered by the bank.
Fixed rate – The interest rate is agreed to at the beginning of the term, and will stay the same until the end of the term.
These definitions are provided to help you begin the process. It is important to ensure that the type of mortgage you select suits your particular needs. In the excitement of buying a new home, it is easy to overlook the details of the financing and focus only on the purchase and perhaps the monthly payments. It is extremely important to consider how long you intend to own the house; whether you require the stability of fixed payments regardless of the variations in interest rates; and how quickly you would like to pay down the amount you have borrowed.
At Dogwood we can help you maneuver through the details of buying your new home. Call us to help you demistify the process.
General Office: 778-410-5090