No one knows for certain which way interest rates will go.
Experts can only make educated guesses. When you have to make an interest
decision, ask around, read published forecasts, decide how important it is for
you to have a fixed interest rate and then make the choice with which you are
most comfortable. If you are a first time homebuyer, it may be safest to start
with a fixed rate to hedge against sharp increases in rates.
Fluctuations in interest rates also affect the choice you make about the term of your mortgage. If interest rates appear to be rising quickly, you may wish to lock in your mortgage for the lowest rate you can get for a longer term. If interest rates appear to be falling, you may wish to get a variable rate mortgage or a shorter term. One important question to keep in mind is how long the quoted interest rate will be honoured. It may be for one day, one month or not at all. While you are shopping around, the rates could be changing.
Here are some interest-related terms you should understand:
FIXED RATE MORTGAGE:
A fixed rate mortgage is one for which the rate of interest is set for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term.
VARIABLE RATE MORTGAGE:
A variable rate mortgage is one for which the rate of interest changes from time to time as money market conditions change. The amount of the regular payment of a variable rate mortgage does not change. The difference lies in the way the payment is applied. If interest rates go up, more of the regular payment will be applied toward interest. If interest rates go down, more of the regular payment will be applied toward the principal. If interest rates rise dramatically, the regular payment may not cover all of the interest owning. In this case, the unpaid interest will be added to the principal still owing. This can erode your equity.
OPEN MORTGAGE:
An open mortgage allows the borrower to repay the loan more quickly than agreed, usually without prepayment charges.
CLOSED MORTGAGE:
A closed mortgage generally does not allow the borrower to repay the loan more quickly than agreed. Payments must be made regularly, as specified in the agreement. If extra payments are allowed, the lender has the right to levy a prepayment charge. These may be specified in the mortgage agreement. In some cases, the agreement permits extra payments without charge.
PORTABLE:
Some lenders offer portable mortgages. The principal balance, the term remaining and the interest rate are transferred to a mortgage on your new property.
BLENDED:
Blended means combing the mortgage balance outstanding on the home you are leaving and adding additional financing to purchase the home to which you are moving. The interest rate will change to one that combines the rate on your old mortgage with the rate in effect at the time you add additional financing.
COMPOUND INTEREST:
Compound interest means interest charged on interest owning. The more frequent the compounding is, the more interest will be paid. Many traditional mortgages have the interest compounded half-yearly (semi-annually), not in advance. However, some mortgages, such as variable rate mortgages, are compounded monthly. You may wish to compare the quoted rate (called the nominal rate) with what the equivalent rate (called the effective rate) would be if the interest were compounded yearly or half yearly. For example, a mortgage that quotes a nominal annual rate of 10.00 per cent has an effective rate of 10.25 per cent when compounded half-yearly and 10.47 per cent when compounded monthly.
BUYING DOWN:
Buying down is a term used when quoting interest rates. It means that someone, usually the vendor or seller has arranged with the mortgage lender to prepay a portion of the interest owning on the mortgage. This allows you, the new borrower, to assume a mortgage debt at an interest rate lower than the current rate of interest is. You should be aware that the amount of the interest prepaid by the vendor is often added to the purchase price of the property. Be wary of an interest rate that seems extremely low when compared with other market rates. When the term is up and you have to renew, you may have difficulty adjusting your budget to cover what may turn out to be a very big increase in interest rate.
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