Seven Important Things to Know about Mortgages
- Type and Term: Most common are Closed Mortgages ranging from 6 months to 5 years; a few lenders have terms up to 15 years. Typically, 6-month and 1-year mortgages can be “Open” or “Convertible”. A true open mortgage can be paid in full at any time without penalty, while with a true convertible mortgage this privilege may have no penalty.
- Commitment Period: This period protects the interest rate in times of market instability. Sixty-day rate guarantees are most common. 120-day rate guarantees can be negotiated and this provides peace of mind when entering a long closing. Meanwhile, you will benefit from any rate drops in the interim. If your mortgage is up for renewal, the lender typically can set your new rate 30 days prior to the renewal date.
- Pre-Payment Privileges: On the anniversary, one is typically allowed to make a lump sum payment of up to 10 or 15 percent of the original loan amount. Increasing your monthly or bi-weekly payments by the same percentage is also allowed. These extra payments directly reduce the principal outstanding and subsequently shortens the amortization period. Negotiating a 20 percent prepayment ability as well as the option to make this payment at any time, is not uncommon.
- Weekly and Bi-Weekly Payments: For the most part, all lenders offer this. It is important though that one expresses a wish for accelerated payments. In effect, this will equal one extra monthly payment per year, and will reduce your amortization period from 25 years to 20 years. You will be mortgage free 5-years sooner!
- Portability: This is very important for long-term mortgages. If your mortgage is not up for renewal, or open, you have the option to transfer it to another qualified property. This will allow you to avoid discharge penalties, which can otherwise be quite high.
- Interest Adjustment Date (IAD): IAD is usually an unexpected expense for most new buyers. Usually mortgages commence on the first of the month; therefore, if you are closing in the middle of the month, unpaid interest is due from that date to the end of the month. This adjustment is deducted from the advance on closing day.
- Mortgage Broker: A mortgage broker allows the borrower access to all mortgage products, and subsequently the best rates and privileges available … with no arranging fees for the qualified buyer.