Fixed Term Mortgage
For fixed-rate mortgages the interest rate is established for the term of the mortgage so that the monthly payment of principal and interest is unchanged throughout the term. Irrespective of whether rates move up or down, you understand precisely how much your payments will be thus making personal budgeting easier. When rates are low, it may be better to take a longer term, fixed-rate mortgage for protection from upward fluctuations in interest rates.
With an open mortgage you have the ability to repay the mortgage at any time without penalty. The availability options are reduced to shorter terms (6 months or 1 year only), and the interest rate is higher than closed mortgages as much as 1%, or more. This type of mortgage is typically favoured by those thinking of selling their home, or if they are going to pay off the entire mortgage (i.e. through the sale of another property, an inheritance, etc.).
Closed mortgages grant the security of fixed payments for terms between 6 months to 10 years. The interest rates are significantly less than open mortgages. They can deliver as much as 20% prepayment of the original principal, which is more than the majority of what people prepay on a yearly basis. However, if you want to pay off the entire mortgage before the maturity, there will be a penalty charge for breaking that mortgage. This penalty is customarily three months interest, or the interest rate differential.
The Adjustable Rate Mortgage (A.R.M.)
A mortgage with a lot of flexibility is the Adjustable Rate Mortgage (A.R.M.), particularly chosen when interest rates are going down. The rate is based on prime minus 0.375% and can be changed monthly to reflect the current interest rates. During the first three months of the mortgage, a sizable rebate on the rate is given as a welcoming offer. The mortgage payments usually remain consistent, but the ratio between principal and interest fluctuates. When interest rates go down, you pay less interest and more principal. If rates increase, you pay more interest and less principal. If rates rise substantially, the initial payment may not cover both the interest and principal. Any portion not paid is still owed, or you may be asked to increase your monthly payment. This mortgage is fully adaptable at any time without any penalties to you (providing that you choose a three-year term or greater), and offers a 20% prepayment privilege at any time throughout the year.
Equity mortgages are evaluated based on the equity of the home (market value minus the mortgage amount). You can receive as much as 80% of the purchase price or value of the property. These are generally offered to applicants that do not meet the normal income and/or credit qualifying mortgage guidelines (i.e. little or no income verification, self-employed, and/or less-than-perfect credit).