Adjustable Rate Mortgage (ARM)

This is a loan with an interest rate that can change during the term of the loan. Payments tend to increase or decrease with the interest rate, which is typically tied to an index, like the prime rate.

Amortize

To amortize a debt means to pay it off in installments that include principal as well as interest.

Appraisal

This is a report made by a professional that estimates the value of the property to be sold or bought.

Annual percentage rate (APR)

This is a calculation of the cost of the loan as a yearly rate, expressed as a percentage. It is normally higher than the interest rate because it incorporates prepaid finance charges that are not part of the interest interest.

Balloon payment

A balloon payment is a payment at the end of a long term loan that is larger than the regularly scheduled monthly payments. It is used on loans that are not fully amortized and thus don’t pay off all the interest.

Borrower

This is someone who receives funds in the form of a loan and must repay the loan in full.

Closing Costs

This is a catch all term for all the fees a borrow must pay upon closing.

Credit Report

Your credit report is generated by a reporting agency like Trans Union, Experian or Equifax and shows historically whether you have been on time with your payments to mortgages, credit cards, rent, utilities, and other debts. It can also show what percentage of your revolving credit you’re using.

Credit Score

Your credit score shows a potential lender whether you’re likely to repay the loan—in other words, whether you’re a good risk or a bad risk.

Equity

Equity is the dollar amount of your home that you really own. As you pay off your mortgage, it is a percentage based on how much of the principal you’ve paid.

Fixed Rate Loan

A fixed rate loan is a loan where the interest rate doesn’t vary.

Foreclosure

Foreclosure is a legal procedure that a lender can use to force you to sell your house in order to repay your loan if you don’t make your payments on time.

Interest Rate

The interest rate is how much it costs to borrow money expressed as a percentage of the amount borrowed.

Lien

A lien is a legal claim against a home, such as a mortgage, tax lien or judgment lien.

Mortgage

This is the promise in which you contractually agree to put your home up as security for a loan to buy the home.

In one of our previous post, we outlined the pros and cons of fixed mortgage rates. Today, we will look deeper into the variable mortgage rates and its variation. You should know upfront that there are two types of variable mortgage rates: The home equity line of credit (HELOC) and the conventional variable mortgage rate. Today, we will discuss of the conventional one and another post will cover the HELOC.

What does a variable mortgage rate means?

A variable mortgage rate is a floating interest rate. It is usually related to the Prime Rate (interest rate determined by banks according to the Central Bank of your Country. Ex: Fed in the US and Bank of Canada in Canada).

It is usually shown as Prime plus a premium or Prime minus a few points for really good clients (high net worth, amount of business with the bank, credit score).

You will usually have a term related to your variable interest rate. During this term, you might have the possibility to trade your variable rate for a fixed rate. It is important to remember that you won’t lock your present rate. You will only have the option to negotiate a new fixed rate according to what is offer on the market at that time.

In order to modify your mortgage interest rate, banks will usually request that you keep at least the same term and same amount (it can obviously be higher) in order to not pay any penalty fees.

Who is it for?

Historically, variable rates are always beating fixed mortgage rate over a 20, 25 years amortization period. During your term, you will probably pay more than if you would have locked a fixed mortgage for a few month of even a year. But overall, you will always be a winner with variable rates.

On the other side, variable mortgage rate also means variable mortgage payments. Some people just can’t afford a mortgage payment increase by $100 a month. This is why they choose the fixed mortgage interest rate.

Some other can’t live with the idea of a payment fluctuation even though they can afford it. The best solution in any personal finance aspect is the solution that let you sleep at night!

On the other hand, someone how has a well balanced budget and free cash flow, should definitely go with a variable rate in order to save more interest charges.

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

When it comes down to buy a property, there are plenty of mortgage products and each of them has several characteristics. One of the most important is the interest rate. This post is about the pros and cons of a fixed mortgage rate. We will also give you examples when a fixed mortgage rate is the best option.

What does a fixed mortgage rate means?

A mortgage comes with an amortization and a term. The amortization is the time you will take to pay off your mortgage completely. For example, you can pay it down over 20, 25, 30 years. The mortgage term, is the time where you sign an agreement with your financial institution. You can usually have term between 1 year and 5 years. Longer term and amortization do exists but banks will usually charge a premium if you ask for a longer term.

A fixed rate is an interest rate that is predetermined for the time of your term. If you take a classical 5 year fixed rate, you are therefore assured that your mortgage rate won’t fluctuate during that specific period. Usually, the longer the term, the higher the interest rate.

Who is it for?

Historically, it is important to know that variable rate are always offering a lower interest rate and fixed rate mortgages. However, if you have a tight budget and can’t afford seeing your mortgage payment going up by $100 a month, you are definitely better off with this type of interest rate.

Therefore, fixed mortgage rates are for young family with a tight budget or if you are buying a rental property and you don’t want to bother about calculating about your investment cash flow. In addition to that, interest charges are usually tax deductible on rental properties (interest charges on regular mortgage is also tax deductible in the States but not in Canada).

Fixed rate mortgages are definitely offering a good piece of mind, however, you must be aware that there is a premium for this “insurance” that your payment will be stable over a few years.

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.