Chapter 4 – Mortgage Types
One of the most important pieces of information to know is your down payment percentage. This will determine whether your mortgage is conventional or hi-ratio, and both have different rules that will affect how much you can borrow.
If you have under 20% of the purchase price as your down payment, your mortgage is considered hi-ratio. Hi ratio mortgages must be insured by a mortgage insurance company.
The insurance premium is charged only once (per mortgage), when the mortgage funds are advanced. You can pay the premium yourself, but most people choose to add the funds on top of the mortgage.
If you have at least 20% of the purchase price as a down payment, you can apply for a conventional mortgage. The advantage of having a conventional mortgage is that you don’t need to pay for mortgage insurance. The regulations are looser on conventional deals, so you can usually qualify for a larger mortgage.
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. It usually doesn’t make sense to get an open mortgage because the interest rates are so much higher than those for closed mortgages with similar terms.
Almost all first time home buyer mortgages are ‘closed’, meaning there is a penalty if you pay them out before the term is up.
FIXED RATE MORTGAGES
Fixed rate mortgages are the most popular type of mortgage. You benefit from the security of locking in your mortgage interest rate, for lengths of time ranging from 3 months up to 10 years.
VARIABLE RATE MORTGAGES / ARM (ADJUSTABLE RATE MORTGAGES)
A variable mortgage is when your payment fluctuates based on the prime interest rate. Prime rate can change every three months. The rate you get on a variable will always be in reference to prime rate (e.g. prime minus .5%). Statistically, variable rate borrowers have saved more money than fixed rate borrowers, but that doesn’t mean that it’s always the correct choice.
New government regulations have made it so you can’t borrow as much money on a variable mortgage as you could on a fixed mortgage.