Choosing a Term that is right for you

When you are deciding what length of term you are going to go with there a few things to consider. How long do you plan to live in the home, when do you plan on paying off the mortgage, where do you see interest rates headed, etc.

What you also need to consider is what will keep you up at night? If you are worried that rates are going to go up, which also means your mortgage payment will go up, then consider a longer term. If rates are hinting to go lower, go with a 6-month convertible that offers the flexibility to lock-in to longer term at any time.

Fixed vs. Variable Rate Mortgages

With a fixed-rate mortgage, the interest rate is set for the term of the mortgage so that the monthly payment of principal and interest remains the same throughout the term. Regardless of whether rates move up or down, you know exactly how much your payments will be and this simplifies your personal budgeting. In a low rate environment, it is a good idea to take a longer term, fixed-rate mortgage for protection from upward fluctuations in interest rates.

A variable-rate mortgage provides a lot of flexibility, especially when interest rates are on their way down. The rate is based on prime and can be adjusted monthly to reflect current rates. Typically, the mortgage payment remains constant. When interest rates are falling, you pay less interest and more principal. When rates are rising, you pay more interest and less principal. Make sure that your variable-rate mortgage is open or convertible to a fixed-rate mortgage at any time, so that when rates begin to rise, you can lock-in your rate for a specific term.

Closed and Open Mortgages – What’s the Difference

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 by as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or if expecting to pay off the whole mortgage from the sale of another property, or an inheritance.

A closed mortgage offers the security of fixed payments for terms from 6 months to 10 years. The interest rates are considerably lower than open, and if you are not planning on any one of the above reasons, then choose a closed mortgage. Lenders offer as much as 20% prepayment of the original principal amount without penalty. If you wanted to pay off the whole mortgage prior to maturity, a penalty would be charged to break that mortgage. The penalty is usually 3 months’ interest, or interest rate differential (IRD).

Amortization

The amortization period is the number of years it would take to repay the entire mortgage amount based on a set of fixed payments. The longer than amortization, the more interest is paid over the life of the mortgage. Therefore, when choosing the amortization period, careful planning should be done to meet your cash flow requirements. Remember, the amortization can be easily shorted after the closing, by simply making arrangements to increase your payments. But it is more difficult to lengthen them as that usually involved re-applying for the mortgage.