Understanding your mortgage options

Congratulations! You've decided to begin your search for a new home, or
perhaps you've already found the home of your dreams and are ready to make an offer. It's now time to consider your mortgage options. But with so many different choices available, how can you select the right kind of mortgage for your needs?

To help you make an informed decision, Canada Mortgage and Housing Corporation (CMHC) offers the following answers to some of the most common questions Canadians have about choosing a mortgage:

What is the difference between conventional and high-ratio mortgages?

A conventional mortgage is a loan for up to 80 per cent of the purchase
price (or market value) of a home. With a conventional mortgage, the buyer supplies a down payment of at least 20 per cent, and mortgage insurance is usually not required. If your down payment is less than 20 per cent of the purchase price, however, you will typically need a high-ratio mortgage. High-ratio mortgages normally have to be insured against payment default.

What are fixed, variable or adjustable interest rates?

When you choose a mortgage, you have to decide whether you want the interest rate to be fixed, variable or adjustable. A fixed rate is locked-in for the entire term of the mortgage. With a variable rate, the payments remain the same each month, but the interest rate fluctuates in accordance with the overall market. For adjustable rate mortgages, both the interest rate and the mortgage payments vary based on market conditions. Talk to your broker to find out which option is right for you.

Should I choose an open or closed mortgage?

With a closed mortgage, you pay the same amount each month for the entire term of the mortgage. Closed mortgages can be a good choice if you want a fixed payment schedule, and you don't plan on moving or refinancing before the end of the term. An open mortgage allows you to pre-pay a lump sum or even the entire loan at any time without a penalty. An open mortgage can be a good choice if you're planning to sell your home in the near future, or if you want the flexibility to make lump sum payments.

What about the term, amortization and payment schedule?

The term is the length of time (usually from six months to 10 years) that
the interest rate and other conditions of your mortgage will be in effect.
Amortization is the period of time (such as 25, 30 or 35 years) over which your entire mortgage debt will be repaid. Lastly, the payment schedule sets out how frequently you will make payments on your mortgage - usually monthly, biweekly or weekly.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.