Buying a home for the first time can be a huge step in a person’s life . Often, the details of the financing for this great leap can seem overwhelming, to say the least. Before going to your bank to pursue the wide array of mortgage options available, it’s wise to understand what a mortgage is and how the various options generally offered by the big banks work.
A mortgage refers to the security on a loan, in almost all cases a loan to buy real estate. Basically, the bank buys the piece of real estate and the buyer pays the sum off gradually over many years with a certain amount of interest accruing to the principle. In addition, a down payment of a certain percentage of the total price of the property is paid at the time of the real estate transaction. Saving for the down payment is usually the first step towards home ownership. However, you are not out of the woods once the down payment has been accumulated. In fact, the hard part has only just begun, as navigating the jungle of mortgages available is a task unto itself.
First, you need to understand the difference between open and closed mortgages. A closed mortgage has a set term for the money to be paid back. This is a good type of mortgage if you know you will not be paying the mortgage back any faster than the original term. Most closed mortgages charge prepayment penalties if you pay back your debt faster and thus save yourself interest payments.
An open mortgage has no prepayment penalties, so you may therefore pay off the mortgage as fast as you can. These types of mortgages often have higher interest rates as it assumes you will be able to pay the principle down relatively quickly and, therefore, avoid paying as much interest over the long term.
The next set of options commonly offered by the big banks are fixed mortgages or variable mortgages. Fixed mortgages have a single interest rate for the entire term of the loan. This is a good option for those who want to know how much their mortgage payment will be each month. Variable rate mortgages change with the market, either saving the buyer money if the market rate is lower than the fixed rate, or costing the buyer if the market rate is higher than normal.
Some banks offer mortgages that combine the approaches, such as convertible term mortgages that act like an open mortgage until you decide what the term will be and close it. Additionally, there are mortgages that have a fixed and variable portion of the loan so you can get the best of both worlds.
Latest Videos of First Time Mortgages:
home-inspection
