Did you know that there are different types of mortgages? The type of mortgage you choose depends on your credit situation, your goals and needs at the time you borrow and the lender you work with. Three of types of mortgages we'll discuss in this post are closed mortgages, open mortgages and convertible mortgages.
Closed mortgages involve an agreement to pay a certain amount each period over a certain amount of time at a certain interest rate. If you make early payments, you might be subject to penalties in a closed mortgage. These types of mortgages are good for the lender, because they ensure compensation if the buyer saves on interest by paying early. They might also be beneficial to the buyer, though, because terms and interest never change.
An open mortgage is more flexible if you think you might want to pay it off early. You can make payments toward the principle at any time without penalties. At the same time, however, you do give up some certainty with regard to interest rates, which can fluctuate over time.
A convertible mortgage is an agreement that leaves the door open for a change in the future. You can enter into a convertible mortgage that is open in nature, for example, and switch to a closed mortgage later.
These are just some of the types of mortgages available, and our discussion only touches on the very basic differences between the types. When dealing with real estate purchases, it's a good idea to work with a professional who understands the law associated with the transactions. Taking time to understand and work within the law now can save you headaches in the future.
Source: Canadian Association of Accredited Mortgage Professionals, "Mortgage Types," accessed Jan. 15, 2016
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