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Mortgage Terms

The length of time for which the interest rate is fixed is called the term. Most mortgages have terms of six months to five years.

Open Versus Closed Term

An “open” mortgage is one which allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term – usually six months or one year. Since open mortgages offer greater flexibility than closed mortgages, they usually have a higher interest rate.

A “closed” mortgage requires you to maintain a specific payment schedule. A penalty usually applies if you repay the loan in full before the end of the term.

Convertible Mortgages

A “convertible” mortgage allows you to renew your mortgage at any time without penalty for a longer term, closed mortgage.

Short Versus Long Term

When interest rates are either high or falling, there is a tendency to choose a shorter term mortgage. This strategy pays off if you can renew at a lower rate six months or one year later.

You may want to consider a longer term mortgage if interest rates are rising, if you have limited income or if you want to keep your mortgage payments the same for a few years.

The Effects of Interest Rates on the Term

As a rule, you’ll find interest rates rise with the length of the term. The lowest interest rates are usually associated with one-year mortgages. Higher interest rates mean higher mortgage payments.

Mortgage Payment Options

The three most common payment frequencies are monthly, bi-weekly and weekly. Increasing the frequency of your payments can allow you to pay off your mortgage sooner and reduce the total amount of interest paid.

You should select a payment frequency based on what is convenient for you. You may want to match your payments to your pay periods. If your goal is to pay off your mortgage quickly, consider accelerated weekly or bi-weekly payment plans. You’ll make the equivalent of 13 monthly payments each year, rather than 12, and realize significant interest savings. Other options are to choose a shorter amortization period or take advantage of prepayment privileges.

Once you’re settled on the type of mortgage that fits your financial circumstance, you are ready to start considering the various options available. Amortization refers to the number of years it will take to repay the loan in full – most commonly 25 years. Longer amortization periods result in lower payments, but increase the total amount of interest paid. If you can handle a shorter amortization period, you’ll achieve tremendous savings on the interest cost of your mortgage and live mortgage free sooner!

Each mortgage payment consists of interest plus repayment of part of the principal. In the early years of a mortgage, a higher portion of your payment is used to pay interest. By the time you reach the last years of your mortgage, almost all of your payment will be applied against the principal.