Lethbridge Mortgage Products
Understanding Your Options for a Lethbridge Mortgage
What is the difference between an open and closed mortgage? What are the benefits of an adjustable rate mortgage versus a fixed rate mortgage? And what are the downsides that the salesperson may not be telling you? We’ll explain these terms in detail.
Open Versus Closed Mortgages Lethbridge
A closed mortgage limits if and when you can pay down the principle balance on the loan. In the most extreme case, you aren’t allowed to pay down the balance except making the scheduled house payments. In many cases, you’re only allowed to make an extra principle payment once a year and up to a predetermined amount. Some lenders and banks allow 20% per month and 20% lump sum per year. An open mortgage doesn’t have these restrictions.
The benefit of a closed mortgage for the lender is a predictable return on their money. They may compensate you by offering a lower interest rate. An open mortgage may let you put additional principle toward the loan and pay it off several years faster, but the lender offsets the potential loss by charging you a higher interest rate and/or fees. An open mortgage will cost you more money if you don’t pay down the loan aggressively. Note that you may be better off with a shorter loan term, since that forces you to pay off the loan faster. Usually by month 3 in an open rate mortgage which is about 5% you will be further ahead paying 3 months interest if you break it early and taking a closed variable rate usually 2 to 3 % lower in rate.
Fixed Rate Versus Adjustable Rate Mortgages
A fixed rate mortgage gives you a predictable house payment every month. The lender risks losing money if interest rates go up, but they will make money if interest rates go down. An adjustable rate mortgage reduces the risk for the lender. You’ll benefit when interest rates go down, though the loan may have a minimum monthly payment you have to make. And you’ll always have to pay toward the principle balance. If interest rates skyrocket, you risk being unable to afford your Lethbridge mortgage. (That’s why the mortgage stress test was implemented.) The interest rate is determined by the Bank of Canada prime rate if they increase or decrease it which correlates with our economy.
Because adjustable rate mortgages shift some of the risk to you, you’ll often see the same or a slightly higher interest rate on the adjustable rate mortgage as the stated rate by the big banks. A fixed rate mortgage will be a fraction to a full point higher. Consult with a Lethbridge mortgage broker to find the best possible interest rate.
You can often roll from an adjustable rate mortgage or ARM to a fixed rate mortgage with the same lender for a modest fee. They will sometimes extend adjustable rate loans with a seamless conversion option so that they can lock in new home buyers who are unlikely to shop around. You can generally convert the ARM to a fixed rate mortgage for the remaining term with no penalty.
Reach out to Lethbridge Whalen Mortgages to discuss the options that will work best for you on your Lethbridge Mortgage we are your Trusted Mortgage Brokers in Lethbridge.