Mortgage Basics
Mortgages come in many different forms. Below you will find a brief comparison of the different types of mortgages and the options that may be attached to them.
Closed vs. Open Mortgages
In general, a closed mortgage offers a lower rate than an open mortgage of the same term. However, an open mortgage lets you pay off as much as you want up to a complete payout, at any time, without penalty. If you're likely to make only regular payments and perhaps limited prepayments, the closed mortgage is usually preferable.
Convertible vs. Open Mortgages
A convertible mortgage also offers a lower rate than an open mortgage of the same term. It provides you with some rights to change to a closed term or another convertible term. Some conditions may apply if changing from a fixed to variable rate.
Fixed vs. Variable Interest Rates
A fixed rate mortgage maintains a constant interest rate throughout the term and may be preferable if you believe rates will rise or if you don't want to take any chances with interest rates. A variable rate can save you money if rates drop. Payments remain constant, but if rates decline, more of the payment is applied to reducing the principal. Of course, if rates go up, more of your payment is applied toward the interest and less to principal.
Short-Term vs. Long-Term
If stability of mortgage payments is important to your budget, you may prefer a term of, for example, three years or longer. Shorter terms may, however, be attractive if you believe interest rates will drop.
