THE DIFFERENT TYPES OF MORTGAGES
If you want to make large payments on your mortgage or pay off the entire mortgage without penalty, then an open mortgage is for you. An open mortgage offers maximum flexibility. These homeowners are willing to accept some fluctuation in the interest rate for the flexibility of paying off part or the entire mortgage before the term is complete.
A closed mortgage is a commitment with a pre-determined interest rate over a pre-determined period. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is paid fully before the end of the closed term. With a closed mortgage, the borrower may select a fixed or variable/adjustable rate depending on their needs or preference.
Closed mortgages generally have lower interest rates than open mortgages. Most lenders will allow borrowers with closed mortgages to make a lump sum payment of up to 20% of the original mortgage amount once a year without penalty. This payment goes directly toward paying down the principal of the amount owing. Many lenders will allow a borrower to increase the mortgage payment up to 20%, as well as allow the lump sum payment.
A convertible mortgage is an agreement made at the beginning of a term that allows homeowners to change the type of mortgage they hold during its term. A convertible mortgage is a right choice if a homeowner wants to start with an open mortgage and then lock into a closed mortgage. It offers lower rates than an open mortgage and has the option of switching to a closed term. Most lenders can also do a conversion to a fixed rate mortgage when the borrower initially selected a variable rate mortgage and now wishes to move to a fixed rate before the end of the term.
A hybrid mortgage is a term used when there is more than one type of mortgage contained in a single mortgage registration. The registration could include:
- A fixed-rate portion.
- A variable rate portion.
- A line of credit portion.
- Any combination of these.
Each lender will have their own name for this type of mortgage, allowing from 2 to 100 different products contained in the registration of the mortgage. This product is suggested for the savvy borrower who will use this as part of their overall financial plan.
This type of mortgage allows homeowners 55 years and older to convert their home equity into either a lump sum payment or monthly cash payment(s), generally for living expenses. A homeowner's equity is drawn down by the lender to the homeowner - the borrower. The loan balance is due when the homeowner no longer wishes to occupy the property as their principal residence or upon the borrower's death. The loan balance is settled from the proceeds of the sale of the property either by the owner themselves or their heirs.