Unless you’re one of the lucky ones, for most homebuyers, a little financial assistance is needed when purchasing a home. This financial assistance is known as a mortgage.

Mortgage, translated from Old French as “dead pledge”, is most commonly provided by a bank, but can also be acquired from a mortgage company and credit union.

One of the most important factors when considering a mortgage is its rate type.

In a variable rate mortgage, the interest rate changes according to the market rate. Therefore, if the market rate goes up, then your rate will go up. Fortunately, it won’t usually go over the fixed rate. A fixed payment is made, whether it be every other week, month or on another schedule, so if the interest rate goes up, then more of the payment is set for the interest. On the other hand, if it goes down, then more goes to paying off the principal (the amount originally borrowed to go towards payment of the property purchased).

If you prefer something that has more “stability”, then a fixed rate mortgage will probably be more to your liking. The interest rate in a fixed rate mortgage stays the same from your first payment to your last payment. The only downfall is that the interest rate tends to be higher than a variable rate mortgage.

Want to go the middle road? Then a capped rate mortgage is best. You’ll get the best of both worlds: an interest rate that can go down as much as the market rate goes, but has a limit on how high it goes.

And don’t forget to find out if the mortgage is open or closed. If it’s open, then you’ll be able to pay the mortgage off faster or renew/refinance it without being penalized. The downfall? It may affect the interest rate, making it higher.

On the other hand, closed mortgages don’t have that flexibility but generally offer a lower interest rate.

This entry was posted on Monday, April 14th, 2008 at 2:14 am and is filed under Trade Talk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.