With a fixed-rate mortgage, the interest rate is set for the term of the mortgage so that the monthly payment of principal and interest remains the same throughout the term. Regardless of whether rates move up or down, you know exactly how much your payments will be and this simplifies your personal budgeting. In a low rate climate, it is a good idea to take a longer term, fixed-rate mortgage for protection from upward fluctuations in interest rates.
A variable-rate mortgage (also called adjustable-rate) provides a lot of flexibility, especially when interest rates are on their way down. The rate is based on prime and can be adjusted monthly to reflect current rates. Typically, the mortgage payment remains constant, but the ratio between principal and interest fluctuates. When interest rates are falling, you pay less interest and more principal. If rates are rising, you pay more interest and less principal, and if they rise substantially, the original payment may not cover both the interest and principal. Any portion not paid is still owed, or you may be asked to increase your monthly payment. Make sure that your variable-rate mortgage is open or convertible to a fixed-rate mortgage at any time, so that when rates begin to rise, you can lock-in your rate for a specific term
An open mortgage allows you the flexibility to repay the mortgage at any time without penalty. Open mortgages are available in shorter terms, 6 months or 1 year only, and the interest rate is higher than closed mortgages as much as 1%, or more. They are normally chosen if you are thinking of selling your home, or if expecting to pay off the whole mortgage from the sale of another property, or an inheritance (that would be nice).
A closed mortgage offers the security of fixed payment for terms from 6 months to 10 years. The interest rates are considerable lower than open, and if you are not planning on any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment of the original principal, and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay off the full mortgage prior to the maturity, a penalty would be charged to break that mortgage. The penalty is usually 3 months interest, or interest rate differential
Once you have the mortgage amount, rate and amortization period, your monthly payment can be calculated. Now is the time to decide how often you want to make your payments, because by selecting the right payment frequency could literally mean thousands of dollars in savings. For example, on a $100,000 mortgage at 8% interest, amortized over 25 years, the monthly payments would be $763.21. However, by simply switching to bi-weekly payments (every two weeks) with payments of $381.61 (half of the monthly payment), there would be a saving of $30,484 in interest! Weekly payments of $190.80 will save $30,839 in interest, and you will be mortgage free in the 19'th year.
You notice that there is very little difference between weekly and bi-weekly payments, however. If you have other payments throughout the month, bi-weekly may be less stressful and easier to budget. If you are self-employed or commissioned, and your income varies greatly from week to week, it may be easier to pay monthly and use your prepayment privileges to knock the amortization period. Also, not all weekly and bi-weekly payments work the same as above. Let the mortgage specialists at First Mutual Mortgage show you how to manage your mortgage to your best advantage.
Owning your own home has several advantages besides the obvious satisfaction you get from home-ownership. You can build equity and enjoy tax deductions, and the quality of your life is greatly improved.
Whether you are a first-time homebuyer, a renter, or you are purchasing a new or second home, we have an assortment of tools and loan programs to meet your individual financing needs. Use our easy-to-navigate site, or contact us directly by phone or by pre-qualifying online.
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