Assuming an Existing Mortgage

By assuming the existing mortgage, you may be able to save on the usual mortgage fees such as appraisal and legal fees. You'll save time, since you don't have to negotiate to arrange financing from another lender and the existing mortgage on the home may be less than the current market rates. Unless otherwise specified, you'll still have to qualify with the lender first!

Vendor Take Back

With a VTB, the vendor also becomes a lender, holding all or some of the mortgage. Sometimes the vendor will offer this loan at lower than bank rates.

Rate of Interest

Quite simply, interest is the cost of borrowing money. There are two types of rate structures: fixed and variable.

A fixed-rate mortgage will remain the same for the length of the negotiated term. Your payment schedule is established in advance. You can choose either an open or closed mortgage, depending on the term.

If you are going to need a high-ratio mortgage, the mortgage broker may require that you take a longer term mortgage (usually, atleast 3 years) so you don't get into trouble if rates rise in the short term. The mortgage
will always be closed but with privileges. Often mortgages only come in two terms; 6 months and one year. Both are generaly at higher rates than a closed contract for the same time period.

A variable-rate mortgage fluctuates with the prevailing market cycles. Your monthly payment will remain constant (usually for a year or two), but the amount allocated to your principal will vary. If the market trend is toward lower rates, this may be a good option. If rates are rising, you may choose to convert to a fixed-rate mortgage. But if you're on a tight budget, you may not like the feeling of uncertainty. You may be willing to pay more for peace of mind.

Terms

Mortgage Term

Over the course of your amortization period, you may have many different mortgages. The term is simply the length of time that interest rates, payment schedules and obligations to the lender exist. When the term comes to a close, you will have the option to renew your mortgage (taking into account current market conditions) at your current or new lending institution. You can also put a lump sum toward the principal without restriction, or pay off your entire mortgage without penalty. If you wish to change the structure of your agreement during the term you may have to pay a substantial fee to the lender.

Choosing Security or Flexibility

Mortgages are available with closed, open and convertible options, with fixed or variable rates. The options you choose will reflect your beliefs about the market -- is it going up or down? -- and your short-term goals and desire for long-term security.

Amortization

This is the amount of time over which the entire debt will be repaid. Most mortgages are amortized over 15-, 20-, or 25-year periods. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.

There Are Ways to Reduce Your Interest Payments 1. Negotiate a shorter amortization period. (That's the number of years over which you'll pay off the total amount of the mortgage. Don't confuse this with the term of the mortgage, which can run from 6 months to 10 years and must be renegotiated.) A shorter amortization period will mean higher monthly payments, but you'll be paying more principal with each payment. Consider this: Let's say you borrowed $100,000 at 10% interest. (I'm using round numbers for ease of illustration and assuming a constant bank rate. You know that today, you'll certainly be able to get a lower rate.) Amortization Period Monthly Payment ....Total Payments ..Total Interest Paid 25 years $895 $268,500 $168,500 20 years $952 $228,480 $128,480 15 years $1,063 $191,340 $ 91,340 10 years $1,311 $157,320 $ 57,320 5 years $2,148 $128,880 $ 28,880 2. Accelerating your payments. Opt for a weekly or biweekly payment schedule. More payments per month mean less overall interest. Let's go back to our $100,000 loan at 10% for 25 years. Payment Schedule Amount Total Interest Mortgage-Free Monthly payment (12) $895.00 $168,500 25 years Biweekly payments (26) $447.50 $118,927 18 years, 10 months Weekly payments (52) $223.75 $118,111 18 years, 9 months

Open Mortgage

This type of mortgage offers a great deal of flexibility, as it can be repaid in part or full at any time without penalty. This is a great mortgage if you believe interest rates are moving down or if you plan to move in the near future. The term may be limited to six months or one year.

Closed Mortgage

Here the interest rate is fixed for the full term of the mortgage, and you will have to pay a penalty to change the agreement conditions. This type of mortgage is ideal for buyers who suspect that interest rates will rise and who are not planning to move in the near future. This type of mortgage is usually available in a wide variety of terms.

Convertible Mortgage

With this mortgage, you'll enjoy the same peace of mind as a closed mortgage, plus the flexibility to convert to a longer closed mortgage at any time without penalty. If you think rates will drop, this will allow you to wait until you feel they have hit bottom, or if rates rise, you can lock in.