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Understanding Mortgages

If you're going to be responsible for paying a mortgage for the next 30 years, you should know exactly what you’re committing to. A mortgage has three basic parts: a deposit, monthly payments and fees. The deposit is generally 10% to 20% of the price of the house. The monthly payment is the amount needed to pay off the mortgage over the length of the loan. The fees are all the costs you have to pay up front to get the loan.

Keeping in mind these basic concepts, let’s look at the two main mortgage variations available:

  • Fixed Rate A fixed rate loan requires a monthly payment that is the same amount each month. When you sign the loan papers you agree on an interest rate and that rate won’t change for a certain period – generally between one and five years.
  • Variable Rate A variable rate loan means the interest rate on your loan changes with prevailing interest rates. If rates go up, so will your mortgage rate and monthly payment. If rates go down, your mortgage rate will drop and so will your monthly payment.

It’s possible to have two loans associated with your property – one fixed rate and one variable. Or you can have a totally fixed rate mortgage, or a totally variable rate mortgage. Your choice will depend on where you think interest rates are heading. If you think they are going up, it’s often an idea to fix the rate to lock in a lower rate. If you think they are going down it might be an idea to have most of your loan on a variable rate. It’s a good idea to get advice on this before making a choice.