Mortgages are of many types, each designed for a particular need and situation of the borrower. Having a basic idea of the various kinds of mortgage will help you decide on the right financing solution when you need one. A good mortgage specialist can also inform you of the various choices of mortgages available in the market. In fact, he/she can even guide you in choosing an appropriate one for your specific need.

Closed Mortgage

A closed mortgage is a mortgage, whose interest rate and repayment scheduled is locked for the whole term. In case you wish to prepay the loan, you will have to pay an additional penalty. This penalty is referred to as the prepayment penalty. Most first mortgages on homes are of this type.

Open Mortgage

An open mortgage offers the flexibility of full or partial early repayment without any penalties. These mortgages may have slightly higher interest rates than closed mortgages to make up for the probability of losing profits due to early repayment of the loan.

Variable and Fixed Rate Mortgage

Variable rate mortgage has fluctuating interest rates over the fixed term of the loan. The interest rate depends on the current market lending rate and can go up or down depending on the lending market scenario. Fixed rate mortgage on the other hand comes with fixed interest rate for the entire term of the mortgage. The monthly payments decided at the beginning of the loan remain the same throughout the mortgage repayment period. These mortgages come at a slightly higher rate of interest to begin with than a variable rate mortgage. This is because they factor the risk of future market lending rate fluctuations. There are merits and demerits of both kinds – it is a good idea to consult a mortgage specialist to decide which type would make more sense for you.

Interest-Only Mortgage

These are mortgages, which require you to make interest only payments for the first couple of years or the entire term of the mortgage. If your interest only mortgage product requires you to pay only interest for the entire loan term then you will be required to pay all the principal in one go, as a balloon payment, at the end of the loan term. Some interest only mortgages also amortize the principal and interest payment over a couple of years, which forms the second part of the loan term after the interest only period.

Second Mortgage

Second mortgage is the second loan on the property, which already has an ongoing first mortgage on it. The second mortgage is taken against the homeowner’s equity in the home. The second mortgage has the second right over the property after the first mortgage in case of repayment default by the borrower.

These are some of the common borrowing options available in the market. Your mortgage specialist would be able to share more financing options with you, and a discussion with him will allow you to choose the right product for your need.

Author Bio: For more information on second mortgages or home equity line of credit in Canada, contact Canadian Mortgages Inc.

Category: Finances
Keywords: mortgages