Mortgages: Which Type of Mortgage Is Right for You?

Once you have a basic idea as to how much you’re qualified to borrow, you can then move onto determining the right mortgage for you. When you first meet with your mortgage agent, you’ll come to realize there are many different elements that are involved in a mortgage.

So, what’s the best mortgage in general?

Of course, there’s no one answer when it comes to choosing the best type of mortgage. Instead, it’s entirely dependent on your lifestyle, your finances and how much risk you’re willing to incur. It also depends on what the economy is like in that very moment.

Let’s begin by choosing one of the most important elements of the mortgage overall: The interest rate.

Interest Rates – Fixed or Variable?

A fixed rate is a loan in which the interest rate remains the same for the entire term of the loan. So, if the loan were initially signed with a 2.59 % interest rate, the borrower can have peace of mind that it will remain that amount for that term.

This is best for borrowers that have minimal interest in risk. Of course, the most prominent advantage with a fixed-rate mortgage is that it offers a sense of stability. This means that the borrower will know their exact payment each month and every month. With this, there is no risk that the prime rate will advance and increase your monthly payments.

A variable rate is a loan in which the interest is attached to an ever-changing prime rate. This means that your interest rate will fluctuate according to whatever the prime rate is at that given time. More often than not, borrowers are initially enticed by variable rates as they are typically lower than fixed rates. However, there is an element of risk associated in doing so as this rate is likely to climb at some point. Without warning, your interest rate has the ability to spike overnight. In opting for a variable rate, you have to ensure that you can afford your monthly payments even in the dark times.

Mortgage Term – Short-Term or Long-Term?

The term of a mortgage refers to the period of time in which the agreed upon elements of the mortgage are in effect. Once this term expires, the elements of the mortgage can be altered, renegotiated and renewed. In most cases, the mortgage is renewed but sometimes with small changes such as a different interest rate.

Generally speaking, a short-term mortgage has a term of three years or less. Borrowers will often choose a mortgage with a short term when interest rates are high. The hope is that once the term is over, the interest rates will have dropped. Since you’re renewing your mortgage, you can now begin your new term with a lower interest rate. Of course, this does contain a certain level of risk as it’s always possible for interest rates to skyrocket by the time your term is finalized.

On the other hand, a long-term mortgage has a term of three plus years. Borrowers will typically opt for a more long-term mortgage when interest rates are low. The only risk is that you are stuck with the terms of that mortgage until the term is over. This means that you cannot renegotiate any element of your mortgage for the duration of that term.

Amortization Period

Another significant element of your mortgage to consider is the amortization period. Amortization refers to the period of time that it will take to pay the mortgage in full. So, let’s consider a mortgage for $500,000 and with an amortization period of 25 years. This means that the borrower is responsible for repaying that loan over the chosen period of 25 years.

In general, the majority of borrowers will choose to have a 25-year amortization period. However, you can choose a shorter period if you’d like to repay your loan over a shorter period of time. One perk of choosing a smaller amortization period is that you will minimize the amount of interest being paid overall. A mortgage with a longer amortization period will result in higher amounts of interest being paid.

At the end of the day, choosing the different elements of your mortgage requires careful planning and consideration. While it can be stressful, know that your lender is available to provide advice and help you come to a sound decision. Your lender will also be able to bring to your attention a variety of other mortgage products that are less common but potentially more catered to your lifestyle.