Kinds Of Mortgages Your Broker Must Explain To You
Open Mortgages
An open mortgage is the right choice for individuals who wish to make huge payments on their mortgage or who want to pay off their whole mortgage without incurring any penalty. Open mortgages provide maximum flexibility. The homeowners who select this particular option are willing to accept some interest rate variation in a trade off for the flexibility of paying off the complete mortgage prior to completing the term.
Nearly all regular mortgages will let homeowners make lump sum payments of as much as 20% of the entire mortgage one time a year with no penalty being given. These are normally called “privilege payments” in the industry. That payment is applied directly to paying down the principal of the borrowed amount. Thus, to be able to make extra payments on your mortgage, you do not necessarily need to select the open mortgage option with its higher interest rates.
Closed Mortgages
Closed mortgages are different than an open mortgage in that the borrower is locked into a commitment over a particular time period at a fixed rate of interest. Usually a buyer who chooses a closed mortgage would be required to pay a penalty to the lender if the loan is paid in full prior to the end of the closed term.
Throughout the term of a closed mortgage, the interest rate would not fluctuate during the length of the term. Moreover, in this kind of mortgage, the duration of the term will not change; therefore, payment amounts are predictable. Also predictable is the principal amount left owing at the end of the term.
Usually, closed mortgages have lower interest rates than open mortgages. Most closed mortgages would let the homeowner pay once a year as much as 20% of the entire mortgage without penalty. This payment is applied directly toward paying down the principal of the amount owed.
Convertible Mortgages
A convertible mortgage is one where an agreement is made at the beginning of a term that allows landowners to be able to change the type of mortgage they hold during its term. Like for instance, if a homeowner would like to begin with an open mortgage and afterward lock into a closed mortgage, then a convertible mortgage is the proper option. This way they are offered the lower rates of an open mortgage and still maintain the choice of converting to a closed term.
Reverse Mortgages
The reverse mortgage is typically just used for older homeowners who wish to convert their equity in their home for cash payments which are often utilized to cover their living expenses. The homeowner’s equity will be gradually withdrawn over a series of monthly payments with this particular type of mortgage. At the end of the loan period or upon the homeowner’s death, the loan balance is due. Normally, this amount is settled by the heirs who usually sell the property to be able to meet the outstanding obligation.
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