Mortgage Primer
Mortgages come in different shapes and sizes. Your mortgage may be a combination of different options. Before you approach lenders, it is a good idea to be familiar with the various types of mortgage.
Closed Mortgage
A closed mortgage has a fixed interest rate and a set, unchangeable term. They have lower interest rates than open mortgages. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is fully paid before the end of the closed term.
Open Mortgage
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. It usually has a short term of six months or one year. The interest rates are higher than those for closed mortgages with similar terms. Despite a higher interest rate additional payments can save you thousands of dollars in interest charges.
ARM (Adjustable Rate Mortgage) or Variable Rate Mortgage
It is a mortgage with an interest rate that changes with the market. Although your monthly payment usually remains the same, the portion that goes towards interest varies each month. Variable interest rate is usually much lower than the fixed interest rate for a long period of time.
High-Ratio Mortgage
If you have between 5% and 25% of the purchase price as your down payment, you can apply for a high-ratio mortgage. This type of mortgage must be insured through CMHC or GE . The insurance premium is charged only once (per mortgage), when the mortgage funds are advanced.
Convertible Mortgage
A convertible mortgage allows homeowners to change the type of mortgage they hold during its term. If a homeowner wants to start with an open mortgage and then lock into a closed mortgage, a convertible mortgage is the right choice. It offers lower rates than an open mortgage.
Portable Mortgage
A portable mortgage is one that you can carry with you when you buy your next home and avoid paying any discharge penalties. You can transfer your rate, balance and maturity date without pre-payment charges. If extra funds are required they can be borrowed at current rates. When the debt on the new house is smaller than on the old house you may pay a penalty on the amount of the reduction.
Assumable Mortgage
Assumable Mortgage allows a qualified buyer to take over the seller’s mortgage, often at an attractive interest rate.