Thursday, January 5, 2012

How I Paid Off My Mortgage........Interest Rates, Terms and Amortizations - Part 3

When it comes to interest rates and terms it's important to know that you can negotiate interest rates. When you see a rate on a banks website, that is called their posted rate. This rate is often set high, so they have room to negotiate. Shop around with different banks, credit unions and other companies that offer mortgages, to see what's best for you. Never get pressured into buying a home or obtaining a mortgage. This is one of the largest purchases you will ever make, so take your time and do your homework.

After you've determined wheather you will qualify for a conventional mortgage, a high ratio, or a HOLC/HELOC, you will need to decide what term is best for you. When I purchased my first home, I put 5% down,(high ratio mortgage) amortized my mortgage over 25 years and took a 5 year fixed rate term.

Mortgage Term
A mortgage term is the length of time your mortgage contract is in effect. It is also how long you are guaranteed a particular interest rate. At the end of your mortgage term you can renegotiate your interest rate.

This is the life of the mortgage. Amortizations are usually 25 years or 30 years, meaning this is the amount of time it will take to pay off the mortgage.

Open Mortgages
An open mortgage can be paid off anytime without a penalty. Most times you can also make additional payments on your mortgage throughout the term without a penalty. Open mortgages usually have higher rates than closed mortgages. The rates are higher because there are more flexibilities when it comes to paying off your mortgage early, or leaving one bank for another.

Closed Mortgages
Closed mortgages have lower interests rates than open mortgages, but are not as flexible. You cannot pay off your mortgage early without incurring a penalty with a closed mortgage. You can however, take advantage of any pre-payment options your bank offers in a closed mortgage.

Convertible Mortgages
This mortgage is similar to the closed mortgage with the added benefit of changing terms without paying a penalty. (This mortgage varies amoung banks)


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Lora Holmes said...

Remember that paying off mortgage is a long-time commitment, which is why you need to set clear plans and goals. For that matter, I think we can agree that many homeowners find themselves stumped between a 30-year and a 15-year payment. Both of these terms have a lot of pros and cons, so I’ll just summarize. 30-year notes provide you with flexibility, while 15-year notes give you a chance to be debt-free earlier. Weigh your options wisely!

Oscar Lang said...

I think it’s great that you outlined the types of mortgages in your post. Knowing mortgages terms and what they mean before you even buy a house will help you with your financial planning. Having a stable financial plan can help you pay off your mortgage and be debt-free quicker.