Do you know your fixed terms from your variable rates? What about the differences between open and closed mortgages?
No? Don’t worry, you’re not alone.
Most of us grew up dreaming of the day that we’d buy our first home, but if you didn’t go to business school then chances are that trying to understand complicated mortgage terms can start to feel like a nightmare.
To help you out we spoke to the experts at Servus Credit Union to put together a rundown of some of the most commonly used mortgage terms. Check out this easy to understand guide on everything you need to know if you’re thinking about taking the plunge into real estate.
A fixed rate mortgage means you can lock in an interest rate on your loan for a certain period of time. This means you’re safe if the future interest rate rises. However, it also means you won’t benefit if the interest rate falls. This is a great option for many people because it gives you the ability to plan your finances and know exactly how much you’ll be repaying.
The main advantage of the variable rate mortgage is that they usually go down if the cash rate decreases which reduces the amount of interest you pay. There are no restrictions on making additional repayments if your home loan has a variable interest rate. However, you should also be aware that variable rates can also go up if the cash rate increases.
Some mortgage terms may allow you to have a convertible mortgage. This means you have a variable rate mortgage that can be converted to fixed rate mortgage at any time. This flexible feature gives you the reassurance that you can lock in your interest rate should the variable rate option no longer meet your financial goals.
This type of loan, also known as a split loan, allows you to pay a fixed rate on a portion of your loan and a variable rate on the remainder. This is great if you want the security of regular payments on part of your loan but also want to take advantage of interest rate drops on the other part of your loan.
Some credit providers offer low interest rates for the first one or two years of your loan, also known as the “honeymoon rates.” It’s a great concept but it also means it’s important to educate yourself on what you can expect after this period of time.
A closed mortgage cannot be prepaid or refinanced before the current mortgage term is finished, although limited prepayments may be allowed. This keeps the interest rate a little lower than open mortgage rates.
An open mortgage gives you the ability to payout, prepay, rewrite or renew at any time, without a penalty.
Debt service ratios are used by lenders to determine if you have the capacity to make payments on a loan or mortgage. It’s calculated by dividing your monthly debt by your monthly income before taxes. If your percentage of debt compared to your income is too high, it might be difficult for you to manage the payments of a mortgage or another loan. You can learn more about the debt service ratio here.
Now that you have these terms down pat, learn how to look good to a lender in the meantime. As a little tip, make sure to see your own credit report, pay your bills promptly, file your tax return on time, borrow within your means, and get your paperwork ready.
Find out more about these terms or any others you’d like to learn by getting expert advice from Servus Credit Union by calling 1-877-378-8728. You can chat about mortgage options to help you make smart decisions about your home and finances. What’s also cool is its Profit Share program that lets you make money by getting a share of Servus profits every year. You can also check how much you can get just by having your mortgage with them.