Mortgage Basics

MORTGAGE BASICS

Mortgage Payments

Mortgage payments are not paid in advance the way rent is. Your first mortgage payment is paid one payment period after the mortgage lender sends the mortgage funds to close the transaction. (For example, the payment period is one month when mortgage payments are monthly, 14 days when the payments are bi-weekly and 7 days when the payments are weekly.)

Mortgage Term

The mortgage term is the amount of time your mortgage contract is in effect. At the end of each term, you need to renew your mortgage for another term or pay it out in full. This is an opportunity to consider whether you’d like to make any changes to your mortgage. Most mortgage terms are five years, though shorter terms may be offered. At the end of the term, you have the option to negotiate the rate, make a penalty free lump sum payment and amend other details of the contract.

Amortization

The amortization period is the length of time it will take you to pay off your entire mortgage. The traditional amortization period is 25 years. You may choose a shorter amortization period. However, the longer the amortization, the lower your monthly mortgage payments, but the more you will pay in interest over the life of the mortgage.

Types of Mortgages

Fixed Interest Rate

A fixed rate mortgage offers the security of a consistent rate. No matter what is happening in the economy that changes interest rates during your fixed rate term, the interest rate on your mortgage will not change. Because the principal and interest payment amount are fixed, you’ll know the exact amount owing on your mortgage at the end of the term, assuming all payments are made timely.

Adjustable Interest Rate

An adjustable rate mortgage, also referred to as a variable rate mortgage, offers an interest rate that changes with your mortgage lenders Prime Rate. Your mortgage payment will change each month the mortgage lenders Prime Rate changes. This adjustment ensures your mortgage continues to amortize properly and the principal balance continues to decrease. You can switch from an adjustable rate mortgage to a fixed rate mortgage at any time with no cost as long as the new term is the same or longer than the remaining length of your current closed adjustable rate term.

– Your interest rate may fluctuate from time to time because it changes with your mortgage lenders Prime Rate

– When your interest rate changes, either decreasing or increasing, your payment amount will change to correspond to the change in rate.

Open and Closed Mortgages

An open mortgage provides the flexibility to repay all or part of your mortgage at any time without a prepayment charge.

Currently all of our mortgage products have a closed term. Closed mortgage terms limit your prepayment options, but usually offers a lower interest rate than an open mortgage.

Regularly scheduled fixed payments are a requirement of a closed mortgage. Prepayment options are available however there are limits to how much of the mortgage can be paid off before the end of the term; exceeding those limits will lead to a prepayment charge.

Long Term or Short Term

A long term mortgage is generally for three years or more. Those who choose a long term mortgage often choose this option for the long term security of budgeting a consistent mortgage payment.

A term of two years or less is described as a short term mortgage. Those who make the choice for short term with a lower interest rate often believe that mortgage interest rates will remain low or further decrease by their maturity date.