Let’s learn about Mortgages…..

What is a Mortgage?

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that reality through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.

Mortgage Types: Open Or Closed

  • You can make prepayments at any time during the term, or even pay the mortgage off completely before the end of the term, without having to pay a prepayment charge.
  • The interest rate on an open mortgage is usually higher than on a closed mortgage with a comparable term length.
  • An open mortgage may be a good choice if:
    • you plan to sell your home soon
    • you intend to make large prepayments that would be more than the amount you would be allowed to prepay with a closed mortgage term.
  • The interest rate on a closed mortgage is usually lower than on an open mortgage with a comparable term length.
  • Your mortgage contract will usually include prepayment privileges, which vary from lender to lender. For example, one lender might let you make a lump sum payment equal to 20% of the original mortgage loan every year, while another might only let you pay down 10% every year. A lender might also allow you to increase the amount of your regular payments.
  • If you want to change your mortgage agreement during the term (for example, to take advantage of lower interest rates), you will usually have to pay a prepayment charge to break your mortgage agreement.
  • A closed mortgage may be a good choice if:
    • the prepayment privileges provide enough flexibility for the prepayments you expect to make
    • you are planning to stay in your home for the remainder of the term of your loan.

Factors that determine your mortgage interest rate?

Many people have the misconception that everyone can obtain the same interest rate. There are many factors that affect the interest rates such as:

  • Credit Score
  • Credit Utilization and Management
  • Down Payment Amount
  • Loan Term
  • Interest Types

  • You will know in advance the amount of interest you will have to pay (assuming you don’t make any prepayments), and therefore how much of the original loan amount will be paid off during the term.
  • The interest rate is set or “fixed” when you apply for a mortgage. This interest rate remains the same for the entire term.
  • The amount of your regular mortgage payments is also fixed.

  • The interest rate can increase or decrease during the term. The interest rate varies with changes in market interest rates.
  • How changes in the interest rate affect your payments will depend on whether your payments are fixed or adjustable:

Fixed Payments

You pay one set amount with each payment.

If the interest rate goes down, more of the payment applies to the principal and you will pay off your mortgage faster.

If the interest rate goes up, more of the payment applies to interest, and less to the principal. Your lender may require you to increase your payments so that your mortgage will be paid off within the amortization period you had originally agreed to in your mortgage agreement.

With fixed payments, you don’t know in advance how much of the principal will be paid off at the end of the term.

Adjustable payments

Your payment amount changes if the interest rate changes. A set amount of each payment is applied to the principal, and the interest portion fluctuates depending on changes to the interest rate.

If the interest rate goes down, your payments will decrease.

If the interest rate rises, your payments also increase. This can make it more difficult to plan your mortgage payments over the term of the agreement, so you need to be sure you can adjust your budget to make higher payments.

With adjustable payments, the amortization period stays the same. You can tell in advance how much of the mortgage will be paid off at the end of the term, because you pay whatever amount is needed to add up to the agreed amount.

  • Some lenders offer “hybrid” or combination mortgages—part of the mortgage is financed at a fixed rate and part is financed at a variable rate.
  • The fixed portion gives you partial protection in case interest rates go up, and the variable portion provides partial benefits if rates fall. The portions may have different terms. For example, a hybrid mortgage may include a two-year term for the variable portion and a three-year term for the fixed portion.
  • Hybrid mortgages that include portions with different terms may be difficult to transfer to another lender.

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Mortgage services provided by German Salamanca Mortgage Agent at C.M.B. Canada Mortgage Brokers Inc. 10134 / M14001678