There are many factors to consider before finalizing your mortgage decision. Before you set out to visit homes with Ottawa Realtors make sure to get your financials in order with the help of an experienced mortgage broker. What are the most crucial factors in selecting the best mortgage when buying a home in Ottawa?
The key ones are amortization, term of the mortgage, open or closed mortgage, interest rate, payment schedules, prepayment privilege and mortgage assumability.
Amortization of a mortgage
Amortization is the length of time over which the regular payments, usually monthly and biweekly, have been calculated on the assumption that the mortgage will be fully paid over that period. In the Ottawa real estate market 25 years is the most common amortization period although there are many options available from 5 to 35 years the shorter.
Term of the Mortgage
The term of the mortgage is the length of time for which the mortgagee will lend you money. The term can vary between 6 months to 10 years. Ask your Ottawa real estate agents what is the best fit for your situation. At the end of each term the homeowner has to renegotiate the mortgage depending on the options available. Remember if you want to renegotiate your term before the end of the term there could be extra administrative charges involved. In reality as there is considerable competition among lenders often there is no administration fee especially if you are transferring a mortgage to another institution and in some cases the other institution will absorb legal fees and costs.
A fixed-rate mortgage will charge a constant interest rate on the loan over the term. A variable-rate mortgage on the other hand, allows the lender to change the monthly interest rate according to the premium interest rate as set by the lender. In a variable mortgage rate the amount of payment would typically stay the same, the proportion paid toward the principal changes.
Open or Closed Mortgage
An open mortgage lets the homeowner increase the payment of the principal at any time. You could pay off that mortgage in full at any time before the term is over without any penalty or extra charges. Because of this flexibility open mortgages cost more than standard closed mortgages. A closed mortgage locks you in for the term of the mortgage and there is a penalty fee for any advance payment. Most closed mortgages have a prepayment feature to allow you to make extra payments without any penalties.
There are various options available including weekly, biweekly, monthly and more. The more frequently you make the payments the lower the interest that you pay. There are also interest only mortgage solutions on the marketplace. Usually mortgage payments are a blend of principal and interest. These have traditionally been amortized using a monthly payment basis.
This is a very important feature to have in your mortgage if it is a fixed mortgage. If it is an open mortgage you can pay the balance outstanding on the mortgage in part or in full at any time without penalty. If on the other hand you have a closed mortgage that does not have any prepayment privileges you are locked in for the term of the mortgage without the privilege of prepaying without penalty. You can have a closed mortgage that still allow you to make extra payments without fees. Generally, you can chose a certain date of period such as the end of the year to make extra payment on you mortgage. Most mortgages allow you to increase your payments between 10 and 20 percent without extra fees.
Mortgage assumability is the ability of the buyer to take over the obligation and payments under the seller’s mortgage. Most mortgage contracts have very clear clauses that deal with the issue of assumability. The lender can agree to full assumability without qualifications, or with qualifications or no assumability at all. This is an important often overlooked factor. You should make sure to fully understand whether your mortgage offer allows you this option.
In some mortgages lenders allow you a feature called portability. This means that if you sell one property and buy another one during the term of the mortgage, you can transfer the mortgage from the first to the second property. This could save you money and avoid penalties and extra fees.
Before you decide on a particular mortgage solution make sure to discuss all of these factors with your mortgage broker and real estate agent. The right mortgage can not only give you better rates but can save you money and allow flexibility for your future plans.