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By understanding these basic mortgage concepts, you’ll be better able to tailor your mortgage to your specific needs.
Variable and Fixed Rate Mortgages
From the security of a fixed rate mortgage to the flexibility of a variable rate mortgage, you have several choices when it comes to interest rates.
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Mortgage Amortization
Choosing the length of your amortization period, which means the number of years you will need to pay off your mortgage, is an important decision that can affect how much interest you pay over the life of your mortgage.
Read More about Mortgage AmortizationMortgage Basics: All About Rates
Your mortgage rate can have a big impact on your monthly mortgage costs. Rates will vary depending on the length of your mortgage term and the type of mortgage you select.
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Variable and Fixed Rate Mortgages
Variable and Fixed Rate Mortgages
When it comes to mortgage rate types, you have two main choices: fixed rate and variable rate. With a fixed rate mortgage, your interest rate is locked in - or fixed - for the term of your mortgage and your payment amount will stay the same for the entire term. Because the interest rate does not change throughout the term you know in advance the amount of interest you will pay and how much you will owe at the end of your term.
With a variable rate mortgage, the interest rate will fluctuate with the prime rate set by your bank. A variable rate will be quoted as prime plus or minus a certain amount. Your payments will still stay the same for the entire term, but if interest rates go down, more of your payment will go towards paying down the principal. If they go up, more of your payment goes to paying interest. Because the interest rate changes throughout the term, it is not possible to know in advance how much interest you will pay and how much principal you will owe at the end of the term. It's also important to be aware that your regular mortgage payment may be adjusted if the amount of your variable payment is not enough to cover the monthly interest on your principal.
And you can convert your variable rate closed mortgage to a fixed rate closed mortgage that has a term equal to or longer than the remaining term of your existing mortgage at any time during your term -- without additional cost.
For most people, the type of rate selected often depends on their comfort level with risk and their expectation as to whether rates will increase or decrease over their mortgage term. Fixed rate mortgages are a good choice if you expect interest rates to rise during the term and you want to lock in a lower interest rate now. Variable rates are good if you are confident that interest rates will remain stable or that the average of the variable interest rate over your term will be lower than the fixed rate you would have paid. Some people prefer the potential money-saving opportunities that may come with variable rates, while others want the stability of a fixed rate.
Talk to your RBC mortgage specialist for personal advice about the best mortgage rate type for you.
Mortgage Amortization
Mortgage Basics: Understanding Amortization
When you apply for a mortgage, you'll need to decide how long your amortization period will be - this is the number of years it will take you to pay off your mortgage in full. If your down payment is 20% of the purchase price of the property or more, you can choose up to a 30-year amortization. If you are putting down less than 20%, the maximum allowable amortization period drops to 25 years - and you'll also need mortgage default insurance.
You can consider a shorter amortization if your goal is to pay off your mortgage faster. With a shorter amortization you'll save money because you'll pay less interest over the life of the mortgage. The trade-off here is that your regular mortgage payment will be higher. On the other hand, with a longer amortization, your payments will be lower, but it will take longer to pay off your mortgage, and your total interest expense will be greater. It really comes down to balancing what you're comfortable with from a payment perspective with what your goal is for the amount of time it will take to pay your mortgage off.
Here's an example: A mortgage of $200,000 at an average fixed rate of 5%, and a 30-year amortization, will have a $1,067 monthly payment, and you will pay $184,253 in interest over the 30-year period. If you shrink your amortization period to 25 years, your monthly payment is higher at $1,163, but your total interest expense will shrink to $148,962 - you'll be saving $35,291.
You may choose a 25 or 30-year amortization to start with, but it's a good idea to take advantage of prepayment options that allow you to pay off your mortgage faster. Even a few small changes can make a big difference in the amount of time it takes to pay off your mortgage and the amount you pay in interest. A few options to consider are: increasing your regular payment amount, choosing an accelerated payment frequency, or making annual lump sum payments. All of the extra funds will go towards reducing your principal so you'll be mortgage free faster. Every bit helps - because let's face it, nobody wants to be paying a mortgage forever.
To find the best solution for you, talk to an RBC Mortgage Specialist today.
Mortgage Basics: All About Rates
Mortgage Basics: All About Rates
When you're buying your first home, you're likely focused on the price of the property and getting the biggest down payment together. But your mortgage rate is another factor that can have a big impact on your monthly mortgage costs. Rates will vary depending on the length of your mortgage term and the type of mortgage you select.
The term is the length of time you agree to a specific interest rate and payment amount. Mortgage terms range from 6 months to 25 years, and generally move up or down in relation to the term length chosen. A 1-year term will typically have a lower interest rate than a 5 or 10-year term, so you need to think about the rate and term combination that you're most comfortable with.
The mortgage type is the other important factor to consider - specifically, whether you want a fixed rate or a variable rate? With a fixed rate, your interest rate is locked in for the term of your mortgage -- and you will know exactly how much of your payment is going to principal and to interest. With a variable rate the interest will change with the prime rate set by your bank but your regular payment will stay the same during the term -- it won't be possible to know in advance how much interest you will pay and the principal amount you will owe at the end of the term.
No matter which mortgage type you choose, it's important to remember that rates can go up, and even a percentage or two can make a difference to your payments. For example, say you have a $200,000 mortgage, a 25-year amortization period and a fixed-rate, 5-year term. At 5%, your monthly mortgage payment will be $1,163. But say after the 5 years is up, the going rate is 6% - that takes your mortgage payment to $1,261. If it climbs to 7%, your payment becomes $1,362. It's a good idea to consider how this might impact your overall budget.
Your RBC Mortgage Specialist can help you decide which mortgage option best fits your needs.
Mortgage Basics: Open or Closed Mortgages
Open or closed? What's best for you as a first-time buyer?
A decision you'll need to make is whether to go with an open or a closed mortgage term? This decision comes down to weighing your need for flexibility against possible cost considerations.
If you are planning to stay in your home for several years, a closed term mortgage may be a great choice. Interest rates are generally lower than with open term mortgages - helping you to save on interest costs and pay off your mortgage faster. If you choose a closed mortgage, and decide to pay off the outstanding balance that you owe before you reach the end of the term - you will pay what's called a "prepayment charge". A prepayment charge is also charged if you decide you want to pay off more than your closed term mortgage allows in a given year.
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n open mortgage can be paid off in part or full at any time without any prepayment charge. As well, an open mortgage can be converted to another interest term at any time without incurring added costs. Because of this added flexibility, interest rates on open mortgages tend to be higher than closed mortgages of the same term and type.
It really comes down to what's important for you - the complete flexibility that comes with an open mortgage, or the lower interest rate that may come with a closed mortgage.
Talk to your RBC mortgage specialist to learn more and to find out what option best meets your unique situation.
Protect your mortgage with insurance
Protect Your Home with Insurance
Your home. It's where you relax, entertain, build memories and live your everyday life.
Have you thought about protecting all you've achieved in case the unexpected happens? Having insurance on your mortgage can provide a financial safety net when you and your family need it most.
HomeProtector insurance from RBC Royal Bank let's you choose from three different coverage options.
You can combine critical illness coverage with life insurance. Should you suffer a stroke, heart attack, or be diagnosed with a life-threatening cancer critical illness coverage pays a lump sum to the outstanding balance of your mortgage, up to a maximum of $300,000.
Or you can choose to combine disability insurance with your life coverage.
Disability insurance is designed to help protect your cash flow should you suffer an illness or injury and be unable to work. It can maintain your regular mortgage payments to a maximum of $3000 per month for up to 24 months - so you can concentrate on your recovery, instead of worrying about keeping up with your mortgage payments.
You can also opt for life insurance coverage only. Should you pass away, the life coverage pays off or reduces the outstanding balance of your mortgage, up to a maximum of $750,000 - helping to reduce your family's financial burden.
Your home is likely the biggest purchase you'll make in your life - and you worked hard to buy it. During what could be a difficult time for you or your family, HomeProtector insurance can protect your home, your family and your lifestyle - allowing you and your family to focus your energies on caring for each other.
Applying is fast and easy. Speak with your RBC mortgage specialist today, call us at 1-800-769-25231-800-769-2523 or visit a branch near you.