When you are considering applying for a mortgage, you need to know that you have different types of mortgage loans available.
Simply put, a mortgage is a loan that you obtain from a lender, usually a bank to help you finance your home purchase. While there are many different mortgage calculators that allow you to determine how much you can afford paying monthly, the risks, among so many other factors, it is important that you choose the right type of mortgage for you.
Choosing The Best Mortgage Loan
In order to choose the best mortgage loan for you, you need to keep in mind that in most cases, a mortgage is divided into two different parts: the principal sum or the amount that you borrow and the interest or the cost that you need to support of borrowing that money.
Generally speaking, the lower the amount of interest that you pay, the better your plan is. However, when you look at the last decade interest rates, you can see that they are near historical lows. So, lenders decided to create different types of mortgage loans.
The Different Types Of Mortgage Loans
#1: Conventional Or Traditional Mortgage:
The conventional or traditional mortgage is the kind of loan where you need to make a 20% down payment and the remaining 80% are provided by the lender. This type of mortgage usually has a loan-to-value ratio.
#2: High Loan-To-Value Mortgage Or High Ratio Mortgage:
This type of mortgage is the one where the borrower has a down payment of less than 20%. In this case, the lender needs to be even more sure that he will get paid. So, when you have a high loan-to-value mortgage, you will be required by law to get mortgage default insurance.
One of the things that you need to keep in mind is that the premiums for mortgage insurance are often rolled into the mortgage monthly payments.
While this type of mortgage isn’t conceivable high-interest rates, the reality is that interest rates are near historical lows. So, this type of mortgage loan is incredibly popular at the moment. So, even if you are able to pay the 20% down payment, you may prefer to pay less and keep the extra cash for emergency funds or closing costs.
#3: Fixed Rate Mortgage:
In this type of mortgage, your interest rate won’t change for a specific period of time, usually between 1 and 5 years.
One of the reasons why many individuals tend to turn to this type of mortgage loan is the fact that you always know the amount that you need to pay at the end of the month.
While the interest rates in fixed rate mortgages tend to be a bit higher than in mortgages with a variable interest rate, you gain stability and predictability. In addition, in case or when the interest rate starts to climb back up again, you will be protected against it.
One of the most popular mortgage products in Canada is the five-year fixed rate mortgage.
#4: Adjustable Rate Mortgage (ARM):
In this type of mortgage loan, the interest rate is reviewed at intervals and it is adjusted according to the current prime rate (the rate at which a commercial bank is optimal customers can borrow money).
In case you are considering this type of mortgage loan, you should keep in mind that the adjustment of the rate affects both the monthly payment as well as the interest rate of the loan.
The main benefit of choosing the ARM is that you can benefit from the lowest interest rates. However, when the interest rate starts to rise, your monthly payment will also increase. In addition, adjustments can occur without a lot of notice and can occur up to 8 times each year.
#5: Variable Rate Mortgage (VRM):
This type of mortgage loan is similar to the ARM since the interest rate also varies based on the current prime rate. The main difference between the two is the fact that with the VRM, you will maintain the amount of your monthly payments. This occurs because the part of the mortgage that fluctuates refers only to the mortgage principal.
Ultimately, this type of mortgage loan allows you to have more stability than on the ARM loans but you can also benefit from lower interest rates.
#6: Convertible Mortgage:
This is the type of mortgage loan where you can move from a shorter to a longer-term or from a variable to fixed rate, when you want, without any penalties.
Convertible mortgages are usually a good solution when you want to take advantage of lower interest rates but when you expect that they will be increasing in the future.
#7: Hybrid Mortgage Or 50/50 Mortgage:
The hybrid mortgage is the one that offers you a mix of fixed and variable rate mortgages. So, you will be able to get the best of both worlds.
With this type of mortgage, part of your loan will be financed at a variable rate and the other part at a fixed rate. One of the things that you need to have on mind is that the terms for both can be different. So, it may be a bit confusing to handle this kind of mortgage as well as it may be difficult if you want to transfer your loan to a different lender.
#8: Closed Mortgage:
A closed mortgage is characterized by featuring more restrictions in terms of renegotiations as well as in terms of being paid off before the term is completed.
#9: Open Mortgage:
The open mortgage is a flexible type of loan where you can make accelerated payments or make lump sum prepayments without any penalties. One of the things that you need to know about this type of mortgage loan is that it usually has higher interest rates than the closed mortgage loan.
#10: Reverse Mortgage Or Home Equity Conversion Mortgage:
This is the type of mortgage loan where you can transform the equity in your home into cash while you are living in your property. This is usually a good mortgage for homeowners who are near their retirement, who already have a considerable equity in their homes and the ones who aren’t planning to move.