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Choosing the Right Mortgage

Over the years, the types of mortgages available to consumers have increased dramatically. Competition among lenders has led to marketing campaigns that promote many different types of options. Generally speaking, once you are able to cut through all of the fluff, you'll have a much easier time making the right decision for your situation.

So, in other words, stick to the basics when shopping around and you'll be able to keep things straight. Here are those basics:

Cost

This is the single biggest issue surrounding a mortgage. Obviously, you want to keep your costs as low as possible, but remember, this does not mean keep your monthly payment as low as possible! We are talking about overall cost here.

When considering cost, then, first of all make sure you are clear about interest rates and how they are calculated. Just like with credit cards, a low introductory rate may seem too good to be true - and it probably is. Most of the time these are simply gimmicks to lure you in. Look instead at your effective interest rate over the entire term of the mortgage, and know how compounding is done!

Keep in mind that most mortgages still do have their interest calculated semi-annually, but some do compound interest monthly. Always remember that the more often a mortgage rate is compounded, the higher your effective rate will be.

Term

Why is the term important? Simply put, it generally will also equal the length of time for which your interest rate is guaranteed. Generally speaking, the longer the term, the higher the interest rate, but this may not always be the case.

The term you choose will boil down to two main factors: your own risk tolerance and your personal financial situation. A longer term is a form of insurance, since you're guaranteeing that your interest rate and payment amount will no change over that term.

If you have flexibility in terms of your personal finances in that you can afford to pay a few extra hundred dollars a month if the interest rate goes up, then that, too, can have an impact on the term. Term, of course, ties in with whether you have a fixed or variable rate mortgage.

Variable vs. fixed rates

Let's face it, variable rate mortgages are hot. With interest rates being at rock bottom the past few years, many consumers have saved a lot of money by having a variable rate mortgage. Variable rates are usually based on the lender's prime rate, meaning that your rate goes up when the prime rate goes up.

If you're looking at getting a variable rate mortgage, read the fine print carefully and be prepared to shop around, since each lender has a different "spin" on the variable rate mortgage they offer. As mentioned earlier, remember to look at the effective interest rate over the entire term, not just the introductory period. Remember, too, that your interest rate is not guaranteed, so very conservative consumers or those in a tight cash flow situation will probably want to steer clear of variable rate mortgages.

Flexibility

With increased competition among lenders, flexibility has become an even more important consideration than before. Some things to look for include your payment terms and conversion options.

For example, can you pay weekly, biweekly, or monthly? Paying weekly, if you can, can shave off interest over time, but if you only get your paycheque once a month, you may prefer a monthly payment.

The ability to make extra payments (and when) is also a consideration. Some mortgages won't allow you to do this, so if you think you might have some extra cash once in a while and might want to make some additional payments, make sure you look carefully for this option.

Another area of flexibility includes the ability to convert your mortgage to a longer term.

In summary, although you will have to do your homework, the savings and flexibility are generally worth it in the end. Remember, cost is most important, but use the competitive market to your advantage to get what's right for you!