More Mortgage Basics You Should Know — and Why!

18 June 2018
Joshua Chisvin

A couple months ago, I not only explained that you should be prepared to understand just what exactly a mortgage is, how it works and why you’re inevitably going to need one — but gave you a few specific examples.

From assumable and blanket mortgages to conventional mortgages to high ratio and vendor take-back mortgages, we certainly covered a lot of ground. But still, for every loan obtained from a bank — or other lender — which will help you finance your real estate purchase that we discussed, it feels like there were just as many that we missed.

So here comes another batch of 'em!

Again, each type will traditionally consist of two parts: the principal sum (the amount borrowed) and interest (the cost of borrowing that money). Again, the best option is always one which minimizes the amount of interest you pay. And again, that still somewhat oversimplifies the whole thing, as mortgages are more than just math.

Here we go:

ASSUMABLE MORTGAGE

This type of mortgage can be assumed by someone else. If you’re looking to assume someone’s mortgage, then you’d usually have to be approved by the current lender, and the terms of that mortgage have to remain the same once transferred

CLOSED MORTGAGE

This type of mortgage has restrictions when it comes to being paid off or renegotiated before the specified loan term is complete. Some closed mortgages cannot be paid off before the term ends without paying a large penalty, and other closed mortgages have a prepayment limit, with the borrower incurring severe penalties if any payment over that limit is made.

COLLATERAL MORTGAGE

This type of mortgage is one in which your lender can lend you more money as your property value increases without needing to refinance your mortgage. It’s a good option if you think you’ll need another loan in the future. If you fell behind on payments, however, the bank has the right to raise your interest rate by as much as 10 percentage points. It is not transferable to another lender, even at the end of the loan term, and that fact has made it a very attractive product for banks who want to retain their customers. Some banks only offer collateral mortgages, so be sure to read the fine print and ensure that you're getting what you think you're getting.

HYBRID MORTGAGE

Also known as a 50/50 mortgage, this type of mortgage is a combination of fixed and variable rate mortgages, allowing you to get the best of both worlds. With a hybrid mortgage, part of the loan is financed at a fixed rate and the other part of the loan is financed at a variable rate. The terms for both parts may be different, which may be tricky to manage when it comes time to renew your term, and it also may be difficult to transfer a hybrid mortgage to another lender. Still, you benefit from stability as well as potentially falling rates.

REVERSE MORTGAGE

Also referred to as ‘home equity conversion mortgages’, this type of mortgage allows you to transform the equity in their home to cash while still living in the property. This has been touted as a good option for homeowners who are nearing retirement and who have considerable equity in their homes if they aren’t planning on moving and need to supplement their retirement income.

  Real Estate