4. Interest Rates? : Information you should know

> Rate of Interest

Quite simply, interest is the cost of borrowing money. There are two types of rate structures: fixed and variable.

A fixed-rate mortgage will remain the same for the length of the negotiated term. Your payment schedule is established in advance. You can choose either an open or closed mortgage, depending on the term.

If you are going to need a high-ratio mortgage, the mortgage broker may require that you take a longer term mortgage (usually, at least 3 years) so you don't get into trouble if rates rise in the short term. The mortgage will always be closed but with privileges.

A variable-rate mortgage fluctuates with the prevailing market cycles. Your monthly payment will remain constant (usually for a year or two), but the amount allocated to your principal will vary. If the market trend is toward lower rates, this may be a good option. If rates are rising, you may choose to convert to a fixed-rate mortgage. But if you're on a tight budget, you may not like the feeling of uncertainty. You may be willing to pay more for peace of mind.

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> Schedule of Payments

There Are Ways to Reduce Your Interest Payments

1. Negotiate a shorter amortization period. (That's the number of years over which you'll pay off the total amount of the mortgage. Don't confuse this with the term of the mortgage, which can run from 6 months to 10 years and must be renegotiated.) A shorter amortization period will mean higher monthly payments, but you'll be paying more principal with each payment. Consider this:

Let's say you borrowed $100,000 at 10% interest. (I'm using round numbers for ease of illustration and assuming a constant bank rate. You know that today, you'll certainly be able to get a lower rate.) 7% or better.

2. Accelerating your payments. Opt for a weekly or biweekly payment schedule. More payments per month mean less overall interest.

Let's go back to our $100,000 loan at 10% for 25 years.

3. Put lump sum payments toward your principal.

When negotiating your mortgage, ask how frequently you can make a lump sum contribution. Most financial institutions allow a percentage of your overall mortgage to be contributed on your annual mortgage anniversary date. Depending on the type of mortgage you select, you may also be able to negotiate additional monthly, or even weekly, payments. These payments will rocket you toward mortgage freedom.

OK, here's another illustration assuming you have an $80,000 mortgage at 8% with a 25-year amortization, and you're able to put an additional $2,000 lump-sum payment toward it every year.

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