It's common to do some research before deciding to make a purchase. We think and act based on factors that shape our decisions and ask legitimate questions like, is this purchase necessary or nice to have? Will it add value to my life? Do I have to cut something from my budget to make room for it?
Shopping for a mortgage is no different.
Read on to learn about the different mortgage features available and how to choose the right one. These are the features I commonly review with clients to help them narrow their search.
Mortgage interest rate: Fixed, variable or hybrid
Undoubtedly, the most attention is given to the type of rate a mortgage comes with: locked (fixed), floating (variable and adjustable), or hybrid.
Will the rate remain unchanged for the term, like a five-year fixed rate? Or will it come with an upfront discount but be subject to change at any time, like a variable rate?
More sophisticated scenarios may require a mortgage with some benefits and pitfalls associated with combining elements of both. Sometimes, your mortgage may have different components, some of which come with fixed or variable rates. Others can come with elaborate bells and whistles where you try to get the best of both worlds into one.
Being aware of your options is excellent, but in most circumstances, the simple answer is the correct one. Complexity can be helpful, but only for the specific scenarios it was designed for.
Term length
Your mortgage's term is how long you will have your rate. When your term is up, you can either renegotiate your rate with the same lender, move to a different one, or otherwise prepay or transfer your mortgage without getting hit with a prepayment penalty.
The trick is to get the best deal possible while lining up your term to coincide with life milestones or significant upcoming events such as selling your home.
Amortization
The amortization period is the time it will take you to pay off your mortgage. Since this will determine your monthly payment, you should think about how long of a mortgage you want to take out. A more extended amortization period (i.e., 25 years) will mean lower monthly payments, but you will also pay more interest over the life of the loan.
Amortization can also depend on the bank's policy and what you’re planning to do, so it's worth running through a few scenarios to have a firm grasp of what this will look like as it will impact your household budget for some time.
Payment options
There are various payment options available when paying down your mortgage. That's why you should take the time to understand frequency, accelerated versus non-accelerated and blended or interest-only options.
- Traditional mortgages.
These have several frequency options: monthly, semi-monthly, bi-weekly, and weekly. This addresses how often to pull money from your bank account and how convenient it is for your situation. - Accelerated vs. non-accelerated.
This is a popular feature where you conveniently overpay a little, with the entirety of that overpayment going directly toward the principal balance of your mortgage. Overall, it’s relatively simple and does produce a measurable outcome at the end of the day. - Blended vs. interest-only payments.
Most mortgage payments are blended, meaning part of your payment goes to interest while the rest goes toward the principal. It's one of many options, and some scenarios call for an alternative. In some cases, the bank will only obligate the client to cover the accrued interest and leave the option of paying down any principal amount to the client at their own discretion.
Once again, lean towards simplicity only if you have a good reason not to.
Prepayment options
Getting a mortgage is great, but what about getting yourself out of a mortgage? One of the options for doing this is to exercise your prepayment privileges. Rules are designed to govern how you can chip away at your mortgage faster, should you choose to do so.
Mortgages often come with a lump sum clause and a payment increase option. The lump sum determines whether you can make a periodic payment directly to your principal balance
by how much and how often. A payment increase option is when you can increase your mortgage payment each month, with the additional amount going to the principal balance.
These can be great options to help you pay your mortgage faster (and decrease your total interest) without penalty.
How to pick a mortgage
When choosing a mortgage, rate, term length, amortization period and payment options are all factors to consider.
If you need help determining where to begin, a mortgage broker can help you navigate the different types of mortgages available, weigh the pros and cons of each, and help you shop around for the best rates, terms, and conditions.
When you're ready to start your search, they can make the process as smooth as possible and ensure you find the mortgage that best suits your budget and long-term financial goals.
