MORTGAGES AND TERMS

Mortgage Term

Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage at your current lending institution or seek out a new lender. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty at the end of a term. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.

Should You Choose Security or Flexibility?

Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market -- is it going up or down? -- and your short-term goals and desire for long-term security. Your tolerance for risk and some uncertainty, will determine whether you might choose a variable or a fixed term.

Amortization

This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20-, or 25-year periods - 30 and 35 year amortizations are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.

Open Mortgage

This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This is a great mortgage if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year but these sometimes come at a higher rate than a fixed mortgage for the same length of term.

Closed Mortgage

Here the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms from 6 months all the way up to 7 and even 10 years.

Convertible Mortgage

With this mortgage, you'll enjoy the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in. This can be the best of both worlds if you aren't sure how you feel about the future of mortgage rates.


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