Some people who have the budget for it can pay for a house entirely in cash. Others, on the other hand, pay for their property by picking a certain mortgage. And considering there are several types of mortgages out there, you need to be smart about what suits your needs and budget overall. Fortunately, that’s exactly what this article is going to help you out with.
Before you can answer the question regarding “what type of mortgage should I get?”, we feel that it is important for you to consider some essential aspects of picking a home loan or mortgage.
Things to Consider Before Choosing a Mortgage
- Determine Your Budget
Since you’re buying a property for yourself, you can expect the budget to hover somewhere around the six-figure area. If you need help figuring your budget out, you can use an online calculator for that. You can find some of the best calculators at Bank Rate and NerdWallet.
If you have a serviceable credit score, then mortgage lenders will be more inclined to know about how much you’re willing to spend to get a house for yourself. Just to clarify things, your budget should allow you the freedom to pay the loan back over the years while also earning your livelihood on the side as well.
- Look for Referrals
When thinking about “what kind of mortgage should I get?” it would be wise for you to ask and browse for referrals. This is when you ask certain people who have a mortgage and inquire whether they can refer you to their lender. In fact, you should prepare a list of referrals by asking real estate agents, a business colleague, or a financial adviser. A reputable real estate agent can give you at least two options.
If you live somewhere in Canada, then you need to look for a loan via reliable Canadian loan aggregators such as Loans Geeks.
- Make a Savings Goal for The Costs Upfront
Not only should you qualify for a big loan, but you should also have some money in your account for a property’s down payment as well as a vast line of closing costs. Down payments served as financial cushions so that you can build equity in the process.
- Check Your Deposit
The more you deposit, the less borrowing you’ll do, and the smaller the loan-to-value (LTV) ratio is going to be, allowing you to qualify for lesser mortgage rates. The LTV ratio refers to the fraction that homebuyers can borrow from the price of the property they’re trying to purchase.
- Get Pre-Approved
Pre-approval enables homebuyers to confirm how much of a loan they can qualify for depending on various factors. It also allows buyers to make a great offer as soon as they find a home they wish to buy. To get pre-approved, mortgage lenders verify the information from buyers through their asset and income documents or are directly contacted by the mortgage company.
And now that we’ve gotten that out of the way, let’s look at the common types of mortgages that homebuyers can opt for:
Types of Mortgages
When pondering over “what type of mortgage is best for me,” you need to consider the following:
- Open Mortgage vs. Closed Mortgage
An open mortgage’s interest rate is typically more than that of a close mortgage with a nearly identical term length. That’s because open mortgages give more flexibility if you’re willing to put the extra money to your mortgage and regular payments.
Open mortgages offer the following facilities during a homebuyer’s term without being penalized for it:
- Pay off mortgages entirely before the term’s end.
- Break off contract to switch lenders before the term’s end
- Have your mortgage renegotiated before the term’s end
Open mortgages are great if you’re looking to move sometime later, pay the mortgage off quickly, or believe you can contribute extra money towards your mortgage.
Closed mortgages, on the other hand, have lower interest rates than open mortgages. This type of mortgage limits the amount of money that homebuyers put on their mortgage yearly alongside regular payments without being penalized for it. The contract for this mortgage features a restriction to the amount of money that you spend extra on mortgages. This is known as a prepayment privilege by lenders. Not every closed mortgage solicits prepayment privileges as they typically vary from one lender to another.
But should you change lenders or break out of your mortgage contract, you’ll be penalized for it.
A prepayment penalty is usually required if:
- You break out of the mortgage contract.
- A payment, which is more than what a lender permit is made
The only time a close mortgage can be a good idea for you is if you’re planning to keep your house for the remainder of the loan’s term or if you have enough flexibility within payment privileges for the prepayments that you’re supposed to make.
- Conventional Mortgages
Conventional loans are the type that isn’t backed by a federal government. Those with stable employment, income histories, good credit, and a 3% down payment can qualify for conventional mortgages backed by Freddie Mac or Fannie Mae.
- Repayment Mortgages
A repayment mortgage is when the property’s equity and interest have to be paid every month. This mortgage ensures that you pay your debts off entirely by the end of the loan term.
- Interest-Only Mortgage
This mortgage is when home buyers repay their property’s equity and interest at the end of the loan’s term. These mortgages used to be popular back in the day as there were fewer monthly costs, and it enabled homeowners to defer payments for their home.
- Adjustable-Rate Mortgages
With these mortgages, the fixed rate is between 3 to 10 years. But the rate starts fluctuating with market conditions as soon as that period expires. There’s a high risk with these loans if one is unable to make bigger monthly mortgage payments as soon as the interest rate resets.
- Fixed-Rate Mortgages
The name of this mortgage is as it suggests, which means that the interest rate is fixed. More specifically, the interest and principal payments won’t be changed during the loan’s lifetime.