Locking in your mortgage: Is that your final answer?

Do you want to use a lifeline? Will you take what’s behind door number 1, number 2 or number 3? Deal or no deal? When it comes down to choosing a mortgage, it can seem as nerve-racking as coming down to the wire on a game show, but with a difference: You normally don’t walk away from a game show any poorer than before you started playing. With a mortgage, we’re talking about your hard-earned money. So, are you ready to lock in your answer — and maybe your mortgage?

With so much flexibility, it’s easy to custom tailor a mortgage that fits your needs.

After weeks or months of searching, you’ve finally found a home you love that fits your budget. And just when you thought all of the pieces of the homeowner puzzle were falling into place, you’re asked to make a big decision: variable or fixed rate?

Here are some facts to help you see your choices more clearly.

Going variable

With a variable-rate mortgage, the rate fluctuates in line with the lender’s prime rate. The way this affects you will depend on the type of variable-rate mortgage you have.

With some variable-rate mortgages, your payments will fluctuate. If rates go up, so will your payment. If they go down, you’ll pay less.

With other variable-rate mortgages, your payment won’t change. Instead, if rates rise, the amount of each payment that is directed toward principal will go down. If rates go down, the opposite happens, and you’ll pay down your principal more quickly.

Variable-rate mortgages can be attractive since the interest rate is lower than for a fixed mortgage of similar size and duration.

Question: Is a variable-rate mortgage for you?

Answer: If you can tolerate the uncertainty, the variable rate could save you money over the long term. In addition, most lenders will allow you to lock in to a fixed rate at any time without penalty.

Locking in to a fixed rate

When you lock in to a fixed-rate mortgage, the interest rate will be higher than for comparable variable-rate products. But this option does have its benefits:

• Your rate is fixed for the term of the mortgage.
• If rates in general rise, your rate is guaranteed not to change.
• From the moment you lock in, you’ll know exactly what your payments will be and how much of the principal will remain at the end of the term.

Question: Should you choose a fixed-rate mortgage?

Answer: If fluctuating rates are going to keep you awake at night, then a fixed-rate mortgage may be worth the peace of mind it can give you.

Decisions, decisions…

Deciding whether to go fixed or variable is only one of the choices you’ll need if you’re getting a mortgage for the first time or renewing. Here are some of the other items you’ll need to consider:

• Term. The mortgage term is the length of time that the mortgage agreement stays in force. This can range anywhere from six months or a year, right up to seven years.
• Amortization. Amortization is the length of time needed to pay off the mortgage in full. Most first-time buyers choose a 25-year amortization. Shortening your amortization period will decrease the total interest you pay.
• Frequency. You can choose from monthly, semi-monthly, weekly, biweekly or accelerated weekly/biweekly. Choosing an accelerated payment schedule means that you make the equivalent of an extra month’s payment over the course of the year. Over the long term, this will decrease your interest costs and help you be mortgage-free sooner.
• Open or closed? An open mortgage can be paid off at any time without penalty. A closed mortgage means that you’re locked in until the end of your term. If you want to pay it off ahead of schedule, there will be a penalty.

With so much flexibility, it’s easy to custom tailor a mortgage that fits your needs. Your choices should always be made with informed advice from a professional, who can help you evaluate the options based on your unique circumstances. Think of it this way: If you’re not continually fretting about making your next payment, you can spend more time actually watching those game shows you (secretly) love. Hey, we all need a little respite at the end of a long day!

 

Psst - If you save a little money on your mortgage, you might sleep better in a new bed from Sealy Bedding or Sears Canada. Of course, pampering yourself with something special from French Connection or Lancome might not be a bad idea either! (From your friends at Golden Girl Finance)

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