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Just as it is important to research financial investments, it is equally imperative that home buyers understand the available options and their financial obligations with respect to a particular mortgage. A critical assessment will ensure that the mortgage meets the individual's needs. It may also affect the financial risk taken on by the borrower.
There are many choices to be made, such as whether to go with a fixed mortgage rate that is constant for a set period of time or a variable mortgage rate that floats on a monthly basis. There is no right or wrong decision here; it is all about personal preference - just like financial risk tolerance. Variable rate mortgages have historically proven to be less costly, but the protection provided by fixed mortgages against interest rate swings can often provide psychological comfort. It is also important to note that the monthly payments with a variable mortgage usually do not fluctuate unless there is a large swing in rates. Instead, modest changes in rates usually affect the portion of the monthly payments that go towards repayment of the principal. When rates rise slightly, more of the payment goes to interest and less to paying down the principal.
There are also many options available today beyond the choice of fixed versus floating. For example, many lenders offer the flexibility to divide the mortgage, with part being paid at a fixed rate and the remainder being at a variable rate. Another recent popular option has been financing through a Home Equity Line of Credit (HELOC). A HELOC is a revolving line of credit that is fully secured by the equity in your home. It provides instant access to cash up to your approved limit and is extremely flexible, since you can draw down on the credit, repay at will and borrow again in the future without new loan applications. Many institutions will allow homes to be purchased with a HELOC, so long as there is a significant down payment.
Individuals need to make a decision regarding the length of time over which they wish to pay back the loan, which is called the amortization period. A shorter time horizon will raise the monthly payments, but reduce the total interest paid. There is also the duration of the current mortgage contract, called the term. For example, one can take a 5-year term, locking in the current financial commitments over the five year period, but with the full mortgage being paid off over an amortization period of 25 years, or longer.
It is also important that home buyers investigate the prepayment options. Some mortgages are closed, meaning that there are limits on prepayment of the loan. Other mortgages are open, which allows the borrower to pay off a portion of the principal without penalties, which can provide huge savings.
There are also an array of other issues that should be considered, but we lack the scope to discuss them here. These include subjects like high-ratio mortgages, collateral mortgages, government-assisted mortgages, assumed mortgages, builder's mortgages, vendor mortgages, and options related to assumability and portability. Nevertheless, the main message is that home buyers should do their research on mortgages. If there are questions, ask mortgage agent about the options. There is also a wealth of books published on the Canadian mortgage market and a wide array of web sites with mortgage related content. And, given today's competitive mortgage markets, it pays ask your agent to shop around.
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