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Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)
Balancing mortgage rate (Comstock Images/Getty Images/Comstock Images)

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Home ownership isn't for everyone Add to ...

If you are in a variable rate mortgage and the interest rate is high while fixed rates mortgages have low interest rates, as some people experienced in 2009 and 2010, you can always switch and lock in to a fixed rate.

Over the past 30 years, variable rate mortgages have been more cost effective about 82% of the time. This may come as a surprise to most of you. Except for short periods, fixed rate mortgages were the better choice only in the late seventies and eighties, when rates rose steadily

Payment Frequency

A closed mortgage does not allow prepayment whenever you have extra cash nor renegotiation of the mortgage conditions before the term ends, unless the lender agrees and the borrower pays a penalty. In recognition of consumer demand, many closed mortgages now allow some prepayment options, the most popular being that of increasing the regular payments or making a lump sum payment against the principle of up to 20% of the original mortgage amount.

If you would like to sell the current house on which you have a closed mortgage and purchase a new one, you can transfer your existing mortgage to the new property and you should not pay penalties. This is called the portability option. When taking out a mortgage, ask the mortgage specialist with whom you are dealing to add this feature to your mortgage, just in case. If you need additional money, the lender will blend your existing interest rate with the present market rates and increase the amount of the mortgage. There are many cases in which the interest rate becomes lower after the term is negotiated.

Some people want to opt out of their mortgages, pay penalties, and renegotiate a new term based on the lower interest rates. If you choose to do so, make sure the penalties you will pay are lower than the savings you will have by changing your interest rate. Ask a mortgage specialist how much money you will save before the end of your term, then decide which way is best.

An open mortgage can be paid off early, in whole or in part, or renegotiated at any time and in any amount without interest penalties. The interest rate you have to pay is usually higher than with a closed mortgage-flexibility costs money! This type of mortgage is recommended when you need a very short term loan and you are expecting to pay it off within six months because you will avoid penalties and administration charges.

Mortgage payments are usually monthly. However, there are some lenders that have accelerated options for semi-monthly, bi-weekly, or weekly payments.

Just by choosing accelerated bi-weekly payments you will pay more towards your principle with each payment and, therefore, pay off your mortgage faster. If you paid get every two weeks, it makes a lot of sense to pay your mortgage lender something from each pay-cheque, rather than paying just once a month. For a mortgage balance of $100,000, with an interest rate of 5% amortized over 30 years, the average monthly payment will be $534, you will pay $92,129 in interest. If you switch to accelerated bi-weekly payments, they will be $267 every two weeks, you will pay $75,115 in interest (a saving of $17,014) and you will pay off your mortgage in 25 years. The reason is that a portion of each payment goes to the principle and you will be reducing you principle faster.

Increasing your payments is the other way to pay off your mortgage faster. Let's say you increase your monthly payment just for $50. Now you will pay $73,878 in interest and you will pay off your mortgage in 25 years. The total saving in interest will be $18,251.

Imagine what will happen if you choose to increase your monthly payment by more than $50 or make more frequent payments. Please don't be lazy. Check every year how much you can increase your payments. This could save you tens of thousands of dollars. Most of the mortgages have options to increase your mortgage payments once a year every year. The increase can be up to 20% or you can double your payments. Make sure you ask for such features when you talk to your mortgage specialist, it will make a big difference in the amount of interest paid and the length of the mortgage.

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