Taking out a mortgage on your first home is arguably the biggest financial decision of your life, so it’s best not to rush into anything. It’s also easy to get confused by the different mortgages available on the market and which one is right for you. If you’ve found your ideal first home, you need to sit down with a mortgage broker and decide on some fundamental requirements.
One of the most popular types of mortgage for first time homebuyers is the fixed rate closed mortgage. This type of mortgage generally offers you a highly competitive fixed interest rate over the full term and is suited to people who will accept a longer term commitment. However, be aware that a closed mortgage is restrictive and usually cannot be renegotiated or refinanced within the term without paying costs to the lender.
A variable closed mortgage on the other hand allows homebuyers greater freedom to take advantage of fluctuations in the monthly interest rate. Consequently, these types of mortgages can save you money or give you the chance to pay off more of your mortgage – up to a certain value – each month or each year. Homebuyers who opt for a variable rate mortgage should budget carefully however, as interest rate rises can cause a nasty shock. The term of closed mortgages – both fixed and variable – can vary from between six months and 25 years.
Open mortgages give homebuyers much more freedom than a closed mortgage. Mortgage brokers won’t penalise you through administration or prepayment fees. They allow you to pay off the mortgage faster and are a good choice if you are planning to sell your home or expecting to receive funds, through an inheritance for example, for a down payment. Like closed mortgages, there are fixed and variable rates are available. The rates are higher but the terms are usually shorter, typically between six months and two years.
A HELOC or Home Equity Line of Credit agreement is essentially a second mortgage and allows borrowers to secure credit against their homes. Like a credit card, the homeowner is granted a credit limit but must pay back what they have borrowed with interest. This type of agreement is ideal for homeowners looking for credit to renovate or consolidate debts. It’s important to consider however that HELOC interest rates are variable and will change over time. Beware too that there is always a chance that your home will decline in value, which could leave you owing more than your home is worth.
Whatever you decide, it’s a good idea to go through a mortgage broker. Mortgage brokers are trained, licensed professionals who represent you and advise you while you’re searching for financing from a lender. By asking about your finances, mortgage brokers can get a good idea of what mortgage will work best for you before comparing the lowest rates from different lenders.
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