The idea of owning our own home is so overwhelming that we often times ignore some very important questions when arranging our mortgages. In addition, we sometimes inadvertently refuse to shop around for the best mortgage terms because the process seems not only to be a very lengthy one, but also an annoying one.
Despite this, it is very important to remember that the mortgage document is a legal contract! Once you have negotiated and agreed to the terms of the mortgage and signed it, the mortgagee advances you the principal, or the funds you need to complete your purchase. You are obligated by law to repay a portion of the principal plus interest according to the terms set out in the mortgage contract. Simply put, the terms can not be changed once agreed upon by both parties.
Many of us agree to these terms out of mere anxiety and impatience, rather than fully understanding the conditions set out in our contracts. The only two things that are of any interest to us are qualifying for the mortgage and the rate of interest to be paid. But is that all we need to know about our mortgages?
What should we really look for when arranging our mortgages?
What is the real rate of interest and how is it calculated? The mortgage market has over time become so very competitive that there is very little difference between interest rates and the way they are calculated. However, it is very important to understand how the interest rates are calculated, in order to know the real interest rate that you will be paying.
From my experience, most times the interested rate quoted at the beginning is not the real interest to be paid, it is generally higher in the end.
Which is the best term for your personal situation? Is the shorter term more ideal for you or is the longer term the perfect match for your situation?
Most terms run up to 25 years depending on your age, but a term may be six months or ten years. Choosing a term to fit your personal situation is very important as interest rates vary according to the term of the mortgage. Generally, the longer term the higher the interest rate, but choosing a shorter term at low interest rate may mean higher interest rate for you when your mortgage is up for renewal. As well as, interest rate may drop by the time your mortgage is due for renewal.
Mastering future interest rates against terms are very difficult, but if you are of the opinion that a short term mortgage is ideal for you then, you may just be saving yourself some money.
What is this? The amortization period is the period of time over which the mortgage would be paid off if you did not miss any payments or make any early payments or the interest rate did not change.
The amortization period can make a great deal of difference to the amount of interest that you pay over the life of your mortgage. Most mortgages are amortized over 25 years, but you can negotiate a shorter amortization period with your lender before you sign the contract.
If you should compare a mortgage amortized over 25 years with one amortized for 15 years, you may find very little difference in the monthly mortgage payments.
Open or Closed
This is where it gets even more interesting. A fully closed mortgage means that you can not discharge the mortgage until the date of maturity without paying a large penalty, as much as six month interest! On the other hand, a fully open mortgage means you can repay any amount of the principal at any time during the mortgage term, without penalty.
In keeping with our earlier argument that, shorter amortized periods may mean less interest to be paid then having a mortgage that is fully closed may not suit your personal situation. However, if your fully closed mortgage is portable, you may wish to transfer the mortgage to another house if you choose to sell the existing one.
Having the option of repaying a portion of the principal annually, or making extra payments without penalty when you receive your company bonus or partner draw is very important. Including one of the two options mentioned when negotiating your mortgage loan may prove advantageous to you.
What happens when the mortgage matures? When our mortgage matures the term of the mortgage becomes fully open and the balance of the principal is payable in full. For most mortgages here in Jamaica when the mortgage matures you are free from any further payments. But did you know that there are mortgages that may require you to pay more at maturity?
Again I urge you to know more about your mortgages. Ask more questions. Do not make the same mistakes others have made. You are the valuable consumer, choose wisely.
Denver Brown is a Financial Service Specialist. You can send comments to email@example.com or contact him at 974-9442 or 577-6087.
Image Credit: Shutterstock.com
Category: Money Basics