Educate Me, Mortgage ?

[Impish]

Ok, I'm completely ignorant when it comes to mortgages, I have literally no clue about them.

 

While I intend to question things w/a mortgage broker when the time comes (maybe now, maybe in 6 mths, waiting to hear) I'd appreciate a crash course from the Hive.

 

What's w/the different terms? I've seen 'variable rate' mortgages, for 1, 2, 3 yr terms and up.

 

I've no idea what the 'best' mortgage would be.

 

Any help/info would be appreciated!

[Audrey]

Check out CMHC's explanations here. Mortgages work slightly differently in Canada than the US. You might also want to check to see if you qualify for a CMHC program.

 

Considering the likely BoC bump in prime, you'll want to get a fixed rate for as long as possible. That is usually not more than 5-7 years, though, so you'll be looking at a jump after that. If we're all lucky, the jump won't be much, but be aware that it could be a lot more.

Edited April 18, 2012 by Audrey

[Impish]

Thanks Audrey!!

[Ecclecticmum]

Um........anytime anyone tries to explain interest & interest rates I go :svengo::willy_nilly::leaving:

 

Completely bonkers. And many, many people (including DH & my father) have tried to explain it to me. My logical mind cannot wrap around it. Once upon time I made the mistake of trying to understand compounding (or whatever it is) interest rates. I literally lost the plot and went a bit weird for a few days.

 

We went with variable, as we knew the interest rates were going to drop, and they did, but now 1 year later, they have been bumped up twice.

 

The good thing about "fixed" interest rates, is you KNOW what you'll pay every month for that period. That you can count on it. Its good for budgets as you can micro-plan every cent, and know exactly whats going on.

 

So it really depends upon the future of interest rates in your country, does it seem like they are going to be on the rise? Is it pretty much for certain that they will have to drop? Or do you need to know you exact spenditure for a bit so you can work on moving and fixing things up without having to worry about rises or changes to the mortgage amount?

 

We spoke with each other, our broker, the bank, checked the news, and spoke to both our parents (my father knows pretty much everything happening round the world in the way of news, interest rates, and shares), and after that we just decided variable was the way to go, but had it been 6 months later, we probably would of gone to fixed 1yr

[Audrey]

Thanks Audrey!!

 

 

No problem, and just in the interest of full disclosure.... I've never had a mortgage myself, but I have helped a lot of immigrants navigate mortgages over the past 8 years. It's not anyone's idea of a good time, but it doesn't have to be as painful as some would make it out to be either.

 

Good luck! :001_smile:

[chepyl]

Get a fixed rate mortgage. Here is is typical to get a 30 year fixed rate on a house. Some people do 15 years. Our mortgage rate cannot change unless we refinance. I dont know of they are different in Canada. We were able to get a very low rate with a first time home buyers program. It really was not to bad and we have done it twice now.

[Impish]

Now I know whose my 'go to' as far as mortgage ?s go...Thanks again, Audrey!

[StaceyinLA]

With rates as low as they are, there would be no logical reason to do otherwise. You'll often get a slightly lower rate with a 15 or 20-yr mortgage versus a 30, but of course, you'll have a higher payment (a lot less payback in the long run though; we will save over $100,000 in interest alone paying a 15 vs 30 on our home).

 

You should make sure you have a mortgage with no pre-payment penalties, because then you can always send in extra principal each month to pay it off sooner, thereby saving even more in interest.

[MrsBear]

The 1, 2, 3 etc. term is the initial period where the interest rate the mortgage starts at stays, after that you'll have another term for how often the mortgage may be adjusted (every 1 year, 2 years, etc.), and a defined maximum the interest may rise with each adjustment and a total maximum the mortgage may rise to over its life.

 

When we were getting our mortgage, the bank was really pushing the ARM they offered.....it was starting at 5%, locked in for 3 years, then adjustments would happen each year, with a max upward adjustment of 1% and a max rate of 12% in the life of the loan - meaning, if interest rates rose and the adjustments over a few years continued to rise too, we could potentially pay a rate of 12% for however long high interest rates lasted before an adjustment back down might happen, if ever in the remaining life of the loan.

 

I remember interest rates in the 80's being crazy high - like 18% - so I did some math and realized if we ever got to high interest again, and had adjustments that took the mortgage up to 12%, we'd be in a too tight position paying it....so we opted for a 30-year mortgage, fixed at 6% and have worked to pay it down and should have it paid off in 15 years. We decided to not go with a 15 year mortgage since the payment was higher and if anything happened we preferred having the lower payment as our option if we needed to just pay the smaller payment in any given month.

 

To give you an example of the difference in payments, using a hypothetical $100,000 mortgage, payments with principle and interest:

 

Fixed 30 year @ 6% = $595.55

Fixed 15 year @ 6% = $843.86

 

On the first, if you increase payment to the 15 year payment, it's paid off in 15 years, but if you hit a bump in the financial road, your mortgage payment in any given month is really only $595.55, not $843.86, so you can pay it off early, but aren't bound to make that high a payment each month.

 

Compare that to an ARM that might be offered at 3.5% as the teaser rate. The payment initially is lower - $449.04 per month. If the rate stays there or drops, you win, you pay less interest over the life of the mortgage than someone with a higher interest fixed mortgage. But - what if rates go up? Say in year 3, your first adjustment hits and it goes up to 4.5% - now your payment is $506.69. The following year, again another point, so you're up to $569.67. Heck, what happens if by year 9 interest rates are still up and you're now at the 12% max in the ARM - your payment is now up to $1028.61 - much higher than the fixed and much higher than adding in the difference between a 15 year and 30 year fixed payment.

 

The thing DH and I asked ourselves when we look at our mortgage options was - worst case scenario, interest rates go up, we're stuck at the max for years.....do we want to pay that much? We said no.

[chepyl]

The 1, 2, 3 etc. term is the initial period where the interest rate the mortgage starts at stays, after that you'll have another term for how often the mortgage may be adjusted (every 1 year, 2 years, etc.), and a defined maximum the interest may rise with each adjustment and a total maximum the mortgage may rise to over its life.

 

When we were getting our mortgage, the bank was really pushing the ARM they offered.....it was starting at 5%, locked in for 3 years, then adjustments would happen each year, with a max upward adjustment of 1% and a max rate of 12% in the life of the loan - meaning, if interest rates rose and the adjustments over a few years continued to rise too, we could potentially pay a rate of 12% for however long high interest rates lasted before an adjustment back down might happen, if ever in the remaining life of the loan.

 

I remember interest rates in the 80's being crazy high - like 18% - so I did some math and realized if we ever got to high interest again, and had adjustments that took the mortgage up to 12%, we'd be in a too tight position paying it....so we opted for a 30-year mortgage, fixed at 6% and have worked to pay it down and should have it paid off in 15 years. We decided to not go with a 15 year mortgage since the payment was higher and if anything happened we preferred having the lower payment as our option if we needed to just pay the smaller payment in any given month.

 

To give you an example of the difference in payments, using a hypothetical $100,000 mortgage, payments with principle and interest:

 

Fixed 30 year @ 6% = $595.55

Fixed 15 year @ 6% = $843.86

 

On the first, if you increase payment to the 15 year payment, it's paid off in 15 years, but if you hit a bump in the financial road, your mortgage payment in any given month is really only $595.55, not $843.86, so you can pay it off early, but aren't bound to make that high a payment each month.

 

Compare that to an ARM that might be offered at 3.5% as the teaser rate. The payment initially is lower - $449.04 per month. If the rate stays there or drops, you win, you pay less interest over the life of the mortgage than someone with a higher interest fixed mortgage. But - what if rates go up? Say in year 3, your first adjustment hits and it goes up to 4.5% - now your payment is $506.69. The following year, again another point, so you're up to $569.67. Heck, what happens if by year 9 interest rates are still up and you're now at the 12% max in the ARM - your payment is now up to $1028.61 - much higher than the fixed and much higher than adding in the difference between a 15 year and 30 year fixed payment.

 

The thing DH and I asked ourselves when we look at our mortgage options was - worst case scenario, interest rates go up, we're stuck at the max for years.....do we want to pay that much? We said no.

 

We have done a 30 year on both houses we have purchased and pay extra principle when we can. We have less tha 5% interest for the life of the loan and no early payoff penalty. A longer mortgage term with a fixed low rate, actiqlly vibrant you the most stability financially because as PP said, you can pay it early but, if finances get tight you are locked into the lowest payment option. Good credit is important because they will give you a loan with okay credit, but your rate will be higher. Better credit gets a better rate, plus with good credit you can shop around for a bank with better closing costs and rates.

[Soror]

All financial advice I have heard in regards to mortgages is to get the lowest fixed rate you can find and the shortest term you can reasonably afford. Dave Ramsey says that one shouldn't get longer than 15 yrs. We did 20 yrs but always paid it like a 15 year. I believe it is recommended as well that mortgage should be no more than 25-33% of income IIRC.

[SebastianCat]

The 1, 2, 3 etc. term is the initial period where the interest rate the mortgage starts at stays, after that you'll have another term for how often the mortgage may be adjusted (every 1 year, 2 years, etc.), and a defined maximum the interest may rise with each adjustment and a total maximum the mortgage may rise to over its life.

 

When we were getting our mortgage, the bank was really pushing the ARM they offered.....it was starting at 5%, locked in for 3 years, then adjustments would happen each year, with a max upward adjustment of 1% and a max rate of 12% in the life of the loan - meaning, if interest rates rose and the adjustments over a few years continued to rise too, we could potentially pay a rate of 12% for however long high interest rates lasted before an adjustment back down might happen, if ever in the remaining life of the loan.

 

I remember interest rates in the 80's being crazy high - like 18% - so I did some math and realized if we ever got to high interest again, and had adjustments that took the mortgage up to 12%, we'd be in a too tight position paying it....so we opted for a 30-year mortgage, fixed at 6% and have worked to pay it down and should have it paid off in 15 years. We decided to not go with a 15 year mortgage since the payment was higher and if anything happened we preferred having the lower payment as our option if we needed to just pay the smaller payment in any given month.

 

To give you an example of the difference in payments, using a hypothetical $100,000 mortgage, payments with principle and interest:

 

Fixed 30 year @ 6% = $595.55

Fixed 15 year @ 6% = $843.86

 

On the first, if you increase payment to the 15 year payment, it's paid off in 15 years, but if you hit a bump in the financial road, your mortgage payment in any given month is really only $595.55, not $843.86, so you can pay it off early, but aren't bound to make that high a payment each month.

 

Compare that to an ARM that might be offered at 3.5% as the teaser rate. The payment initially is lower - $449.04 per month. If the rate stays there or drops, you win, you pay less interest over the life of the mortgage than someone with a higher interest fixed mortgage. But - what if rates go up? Say in year 3, your first adjustment hits and it goes up to 4.5% - now your payment is $506.69. The following year, again another point, so you're up to $569.67. Heck, what happens if by year 9 interest rates are still up and you're now at the 12% max in the ARM - your payment is now up to $1028.61 - much higher than the fixed and much higher than adding in the difference between a 15 year and 30 year fixed payment.

 

The thing DH and I asked ourselves when we look at our mortgage options was - worst case scenario, interest rates go up, we're stuck at the max for years.....do we want to pay that much? We said no.

 

We do the exact same thing. We should have our mortgage paid off in a total of about 10-15 years, but we got a 30 year mortgage so that if something happened to our income, we could back off the accelerated payments and still afford the payment.

 

I believe it is recommended as well that mortgage should be no more than 25-33% of income IIRC.

 

Agree with this as well.

[jennynd]

We do the exact same thing. We should have our mortgage paid off in a total of about 10-15 years, but we got a 30 year mortgage so that if something happened to our income, we could back off the accelerated payments and still afford the payment.

 

 

 

Agree with this as well.

 

we do the same also, we also setup bi-weekly account. so rather than 12 payment/yr, we make 13 payment/yr. that i believe drop from 30 yrs to 23 yrs

[MomatHWTK]

Try here:

http://www.financiallitnow.org/learn/financial_goals/owning_a_home/mortgage_rates.shtml

 

Bankrate.com also has a good tutorial, but it is surrounded by ads for mortagages. ;)

[Carpe]

Things are very different in Canada. From the American perspective all Canadian loans are balloon loans. There is an amortization period, typically 25 years for a new mortgage but can be 1 to 30 years. There is also a mortgage term which can be pretty much any length of time, the longest I have seen is 10 years.

 

Mortgages can be fixed or variable rate, and open or closed. Fixed rate is fixed interest, fixed payment, and fixed amortization. Variable rate has a variable interest rate and either a fixed payment (and variable amortization) or a fixed amortization (and variable payment). Open means that it can be paid off at any time with no constraints whatsoever. Closed can mean a variety of things, normally just that they are limits on paying off the loan. Some banks offer prepayment options on their closed mortgages. There are a variety of those so if you plan on paying your mortgage faster than your amortization, shop around.

 

The best deals seem to be the 5 year fixed rate closed mortgages with a 25 or fewer year amortization.

 

After the term of your original mortgage is over you can just renew with your bank without (from what I understand) any additional approval process, or you can shop around and apply for another mortgage (which does require approval all over again).

[DawnM]

What that is accurate in theory, the reality is that 30 year mortgages carry higher interest rates. When we were looking it was a full percentage point. So even paying the 15 year rate doesn't get it paid off in 15 years. Also, since interest is so heavily front loaded, the interest paid on a 30 year is going to be MUCH higher. Again, even if you pay more like a 15 year, you still will pay more interest because of the front loading.

 

We had a 30 year. We used to see that our payments were about 75% interest. We changed to a 15 year and our payments within one year were less than 50% interest.

 

Dawn

 

 

To give you an example of the difference in payments, using a hypothetical $100,000 mortgage, payments with principle and interest:

 

Fixed 30 year @ 6% = $595.55

Fixed 15 year @ 6% = $843.86

 

On the first, if you increase payment to the 15 year payment, it's paid off in 15 years, but if you hit a bump in the financial road, your mortgage payment in any given month is really only $595.55, not $843.86, so you can pay it off early, but aren't bound to make that high a payment each month.

 

Compare that to an ARM that might be offered at 3.5% as the teaser rate. The payment initially is lower - $449.04 per month. If the rate stays there or drops, you win, you pay less interest over the life of the mortgage than someone with a higher interest fixed mortgage. But - what if rates go up? Say in year 3, your first adjustment hits and it goes up to 4.5% - now your payment is $506.69. The following year, again another point, so you're up to $569.67. Heck, what happens if by year 9 interest rates are still up and you're now at the 12% max in the ARM - your payment is now up to $1028.61 - much higher than the fixed and much higher than adding in the difference between a 15 year and 30 year fixed payment.

 

The thing DH and I asked ourselves when we look at our mortgage options was - worst case scenario, interest rates go up, we're stuck at the max for years.....do we want to pay that much? We said no.

[Tammyla]

(Canada may be different.) But...I would caution you towards using a mortgage broker that isn't tied to a bank. Many times they don't show you all the available loans and programs and can actually have hidden points &

%s back that you will never know about. (This can lead them to steer you towards a higher rate, special or fee loan in order to get the cash in their pocket.)

[MrsBear]

What that is accurate in theory, the reality is that 30 year mortgages carry higher interest rates. When we were looking it was a full percentage point. So even paying the 15 year rate doesn't get it paid off in 15 years. Also, since interest is so heavily front loaded, the interest paid on a 30 year is going to be MUCH higher. Again, even if you pay more like a 15 year, you still will pay more interest because of the front loading.

 

We had a 30 year. We used to see that our payments were about 75% interest. We changed to a 15 year and our payments within one year were less than 50% interest.

 

Dawn

 

You have to compare apples to apples, which is why I used the same exact interest rate on the two hypothetical mortgages, both 100,000, both at 6%, one at 30-year, one at 15-year.

 

If you go to any loan calculator online, the 30-year mortgage for $100,000 at 6% has a payment of $595.55 per month.....the 15-year at 6% is a payment of $843.86.

 

If one were to take a 30-year mortgage and pay it like a 15 year mortgage - that is bump the monthly payment up to $843.86, it will be paid in full in 14-years, 11-months, with total interest paid being $51,473.99......if you took the 15-year term instead (same interest rate), it would be paid in full in 15 years, with total interest paid being $51,894.23 - you'd have paid, over the term, $420.24 more in interest on the 15-year loan than a 30-year loan (same interest rate) and would not have had the cushion of a lower absolute payment due in any given period of time if needed because of financial hardship that sometimes happens.

[OrganicAnn]

Unless you are on top of everything and have a very good reason to do it, I would not go for variable rate. Fixed rates are less risky. I've heard that people expect interest rates to start going up in about 2 years (who knows if that is true). The shorter the term the better, so 15 is better than 20 which is better than 30. But reality is that most people need to go 30 years. If you put down less than 20% you often have to pay for private mortgage insurance, which is insurance that benefits the bank. The best scenario is to save up as much as you can, put down the largest down payment you can, get the lowest fixed interest rate that you can and have it all be well within your means so that you don't ever have to worry about paying the mortgage.