By assuming the existing mortgage, you may be able to save
on the usual mortgage fees such as appraisal and legal fees.
You'll save time, since you don't have to negotiate to arrange
financing from another lender and the existing mortgage on the
home may be less than the current market rates. Unless otherwise
specified, you'll still have to qualify with the lender first!
Vendor Take Back
With a VTB, the vendor also becomes a lender, holding all or
some of the mortgage. Sometimes the vendor will offer this loan
at lower than bank rates.
Rate of Interest
Quite simply, interest is the cost of borrowing
money. There are two types of rate structures: fixed and variable.
A fixed-rate mortgage will remain the same
for the length of the negotiated term. Your payment schedule
is established in advance. You can choose either an open or
closed mortgage, depending on the term.
If you are going to need a high-ratio mortgage,
the mortgage broker may require that you take a longer term
mortgage (usually, atleast 3 years) so you don't get into trouble
if rates rise in the short term. The mortgage
will always be closed but with privileges. Often mortgages only
come in two terms; 6 months and one year. Both are generaly
at higher rates than a closed contract for the same time period.
A variable-rate mortgage fluctuates with the
prevailing market cycles. Your monthly payment will remain constant
(usually for a year or two), but the amount allocated to your
principal will vary. If the market trend is toward lower rates,
this may be a good option. If rates are rising, you may choose
to convert to a fixed-rate mortgage. But if you're on a tight
budget, you may not like the feeling of uncertainty. You may
be willing to pay more for peace of mind.
Over the course of your amortization period, you may have many
different mortgages. The term is simply the length of time that
interest rates, payment schedules and obligations to the lender
exist. When the term comes to a close, you will have the option
to renew your mortgage (taking into account current market conditions)
at your current or new lending institution. You can also put
a lump sum toward the principal without restriction, or pay
off your entire mortgage without penalty. If you wish to change
the structure of your agreement during the term you may have
to pay a substantial fee to the lender.
Choosing Security or Flexibility
Mortgages are available with closed, open and convertible options,
with fixed or variable rates. The options you choose will reflect
your beliefs about the market -- is it going up or down? --
and your short-term goals and desire for long-term security.
This is the amount of time over which the entire debt will be
repaid. Most mortgages are amortized over 15-, 20-, or 25-year
periods. The longer the amortization, the lower your scheduled
mortgage payments, but the more interest you pay in the long
Are Ways to Reduce Your Interest Payments
1. Negotiate a shorter amortization
period. (That's the number of years over which you'll
pay off the total amount of the mortgage. Don't confuse
this with the term of the mortgage, which can run from
6 months to 10 years and must be renegotiated.) A shorter
amortization period will mean higher monthly payments,
but you'll be paying more principal with each payment.
Let's say you borrowed $100,000
at 10% interest. (I'm using round numbers for ease of
illustration and assuming a constant bank rate. You know
that today, you'll certainly be able to get a lower rate.)
2. Accelerating your payments.
Opt for a weekly or biweekly payment schedule. More payments
per month mean less overall interest.
Let's go back to our $100,000
loan at 10% for 25 years.
Monthly payment (12)
Biweekly payments (26)
Weekly payments (52)
This type of mortgage offers a great deal of
flexibility, as it can be repaid in part or full at any time
without penalty. This is a great mortgage if you believe interest
rates are moving down or if you plan to move in the near future.
The term may be limited to six months or one year.
Here the interest rate is fixed for the full term of the mortgage,
and you will have to pay a penalty to change the agreement conditions.
This type of mortgage is ideal for buyers who suspect that interest
rates will rise and who are not planning to move in the near
future. This type of mortgage is usually available in a wide
variety of terms.
With this mortgage, you'll enjoy the same peace of mind as
a closed mortgage, plus the flexibility to convert to a longer
closed mortgage at any time without penalty. If you think rates
will drop, this will allow you to wait until you feel they have
hit bottom, or if rates rise, you can lock in.