Mortgage features

It all has to start with understanding what a mortgage is? 

To put it short, a mortgage is a loan that helps you to buy a home or other property. If you are considering taking a mortgage for whatever reason, first it is important to have a general idea and understanding on what are the key aspects and characteristics of mortgages. Let’s break them all down. 

First, let’s start with understanding the types of mortgages and the specifics connected to them. 

Open and Closed Mortgages:

The main point of differentiation for those two types of mortgages is the amount of flexibility you have in the process of making extra payments or completely paying off your mortgages.   The extra money that you can put towards your mortgage is called prepayment, which on its turn allows you to pay down your mortgage faster.  

Open Mortgages:

If you are considering to take open mortgages this is what it can offer you at any time during your term without paying a penalty fee. 

  • Pay more than your regular monthly payment for your mortgage is without any penalties
  • Completely pay off your loan before the end of your term
  • Open mortgages also give you an opportunity to renegotiate your contract before the end of your term
  • In case of an open mortgage, you can also break the contract in order to change the lender at any time before the end of your mortgage term

Closed Mortgages: 

Unlike the open mortgages, in case of the closed mortgage terms, you cannot make any extra payment and try to decrease your regular payments without a penalty. In the contract, you have to agree on a specific amount of extra payment you are allowed to make in case of a closed mortgage. It is often called prepayment privilege by your lender. However, unfortunately, not all of the lenders allow prepayment privileges and it very much depends on the lender you will choose and work with. That is why it is important to research and take into account this aspect before deciding on a final lender.

Moreover, if you break your mortgage contract or change a lender you will have to pay a penalty fee. You will generally be required to pay a prepayment penalty in the following cases:

  • In a case when you make a prepayment that is higher than what your lender allows you to pay
  • In a case when you decide to break your mortgage contract before your term.

Fixed or Variable Interest Rates

Another important aspect to consider before applying to a mortgage is, of course, the interest rate of the loan you are going to pay. That is why it is also important to know about different options and types that are available to you. There are typically two types of interest rates for mortgages. Let’s have a look at them separately. 

Fixed Interest Rate Mortgage

In case of a fixed interest rate, the amount of the money you have to pay will stay the same over the period of your mortgage term. However, fixed interest rates are usually higher than variable interest rates. 

A fixed interest rate mortgage may be a better option for you to consider in case you want to: 

  • keep your payments fixed and stable over the term of your mortgage
  • know from the right beginning the exact amount your mortgage (principal) will be paid off by the end of your term
  • Keep you same from an interest rate going up over your mortgage term, because you will be paying the same amount with the same lower rate you had contact on.

Variable Interest Rate Mortgage

In a sense, variable mortgages are the opposite of fixed ones. To put it short, unlike the fixed interest rate in case of a variable mortgage your interest rate will vary from time to time. If you choose this type of loan you will most probably be offered a lower interest rate. However, you should take into account the fact that the rate can increase or decrease over the term of your mortgage. 

You have to take into consideration that the increase and fall of interest rates are difficult to predict. So, it is a good idea to consider how much of a rise in mortgage payments you’d be able to afford if interest rates increase. 

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