Understanding How Interest Rates Will Affect Your Mortgage Payments
One of the trickier factors of a mortgage is determining the best interest rate set-up with your bank or lending institution. While this is a conversation primarily between the lender and the borrower, the real estate lawyers of Blackburn Lawyers will review your contract before you sign anything.
Based in Richmond Hill, Ontario, our goal is to make sure you understand the impact the interest rates will have on your finances.
Fixed vs. Variable Rate
The two most common options for mortgages are fixed rate and variable rate. With a fixed rate mortgage, the interest rate you select will remain the same throughout the term of the mortgage. It provides you with some measure of certainty if that is what you are after. With the variable rate the interest you pay will increase or decrease based upon the lender’s prime rate. For the last number of years this option has resulted in the best deal for borrowers, however there is a risk that the interest rate will increase. Generally, you will be granted a privilege to lock in your rate or convert the mortgage to a fixed rate but you will have to remain very vigilant as to what is happening with rates.
Short term vs. Long term
You can select from a number of options offered by lenders. From open which means you can pay it off at any time without being charged a penalty. Normally this privilege means you will be charged a higher rate of interest. A long-term mortgage cannot be paid off until the end of the term. Generally, lenders will grant limited prepayment privileges such as up to 10% of the original amount once each year and/or increasing your normal payment by up to 10%. Apart from such privileges if you need to pay off your mortgage prior to the end of the term you will be charged a penalty. Inquire and determine your lender’s policy in these matters. Some lenders will let you port or transfer your mortgage to a new home you purchase before the end of the term of your mortgage but there are conditions to be met before you will be permitted to do so.
How long will your lender hold the mortgage interest rate you have been approved for?
This will vary amongst lenders but generally no longer than 60 to 90 days. Be certain it will be a long enough period of time to include your closing date or you could be faced with increased mortgage rates. This can be a significant issue if you are buying a new home or condominium. Generally, the closing date will be a year or more in the future. If the builder is working with a specific lender they may have a program that will guaranty your rate for 18 months or some longer period designed to match your closing date.
One piece of advice
People will seldom have extra money to pay down on their mortgage at year’s end. However, if it is possible at all, select your mortgage payments as being bi-weekly accelerated payments. The result is that you will be paying one half of your usual monthly payment every two weeks. Over the course of a year you will end up paying one full extra month’s payment spread out over 26 equal payments. This additional amount comes off of the principal. The result is a savings to you of thousands of dollars in interest and years of mortgage payments.