A mortgage is not a one size fits all contract! In fact, when applying for a mortgage, you must consider several factors to understand which mortgage is right for you. So continue reading to learn more about 5 things you should look for in a mortgage before you seal the deal!
A mortgage term is the length of time your mortgage is in effect. The mortgage contract outlines your mortgage term (length of time from months to years), your interest rate, and the terms and conditions stated by the lender. When committing to a mortgage term, consider the length of time it will take to own your home, your monthly payments, and the interest rate. The average mortgage term is 25 years. Discuss with your financial planner which option is best for you before committing to a long-term mortgage.
Your Interest Rate
The interest rate on your mortgage is one of the most important aspects to consider before committing to a loan. Are you opting for a fixed-rate mortgage or variable? A fixed-rate mortgage is a mortgage loan where the interest rate does not fluctuate and remains the same throughout the mortgage term. As opposed to variable-rate, where it fluctuates as interest rates rise or fall. A fixed interest rate can be easier to budget for. Still, a variable interest rate can potentially save you money if interest rates go down. Of course, if interest rates go up, your variable mortgage payments will increase.
Your Amortization Period
The amortization period is the length of time it takes you to pay your mortgage off in full according to your regular payments. Understandably, a more extended amortization period means you will pay more interest than if you had gotten the same loan with a shorter amortization period. When the amortization period is longer than the payment term, the left balance is called a balloon payment. For example, if you have a 10-year term and a 20 year amortization period — you will have 10 years of the loan principle due at the end of your term.
Your Prepayment Privileges
A mortgage prepayment means you can prepay a mortgage principal before it is due without penalty. When you make an extra payment to the mortgage, you directly reduce your principal. However, your total monthly payment will remain the same. Some mortgages have the option of paying 10% to 20% of the original principal amount each year without a prepayment charge, so be sure to speak with your lender.
A home equity line of credit (HELOC) is a secure line of credit with the lender using your home to guarantee that you will pay the money back. You can borrow money, pay it back and borrow it again with a maximum credit limit. When combined with a mortgage — a HELOC is called a re-advanceable mortgage. A cashback option on your mortgage is also something to consider. It can be beneficial as the lender advances you a cash sum when your mortgage closes. It varies in percentage with each lender. However, the average cashback option is 5%.
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