Mortgage Options Assuming an existing mortgage You take over the vendor's mortgage as part of the price you pay for the house. Assuming an existing mortgage is quick and saves you money on the usual mortgage arrangement fees, such as appraisals and legal fees. When you assume a mortgage, you don't have to arrange financing from another lender, and the rate on an existing mortgage may be lower than the prevailing market rate. Sometimes, if it is specified in the original mortgage agreement, a mortgage can be assumed automatically. If not, you may have to qualify with a lender first. Vendor Take Back (VTB) This is basically a second mortgage; it means the vendor lends you the money to purchase the home. For example, on a home that costs $150,000, if the vendor has an existing mortgage of $70,000 that you can assume, and you have $40,000 for a down payment, the vendor may lend you the outstanding $40,000, which you pay back monthly. The vendor may be able to offer this loan at less than bank rates. Some vendors will sell this mortgage to a mortgage broker instead of holding it themselves. Interest Rate Buy-Down A vendor -- usually a new home builder -- pays the lender a sump sum to lower the mortgage interest rate by up to 3% over a fixed term, usually one to two years. A payment of $2,000-$3,000 reduces your mortgage rate by about 2%, increasing the mortgage interest amount for which you qualify. New home builders may offer buy-downs or discounts on the mortgage rate to encourage sales. But vendor financing is usually not renewable, so you have to be prepared to pay the going market rate when the mortgage is renewed.  However, the builder may add the amount into the price of the home, and you may end up paying a higher mortgage principal. Rate of Interest: Fixed vs. Variable Interest is the cost of borrowing money, and is paid to the lender. Mortgage interest rates are affected by the prevailing market interest rates. Mortgage rates are either fixed or variable. A Fixed Rate is locked in, so that it will not rise for the term of the mortgage. A Variable Rate will fluctuate. The rate is set each month by the lender, based on the prevailing market rates. Your monthly payment is fixed to be the same each month for the term of the loan, but the percentage of each payment that goes toward the interest, and the percentage that pays down the principal, changes. A variable rate can be a good choice if rates are high when you arrange your mortgage, and then fall afterwards. But if rates rise, you may want to convert to a fixed rate; however, bear in mind that this can cost you a cash payment penalty. If you select a variable rate, your lender may limit the mortgage amount for the purchase price of the home and require a higher down payment on either a conventional or high-ratio mortgage. Also, some lenders offer a protected or "capped" variable rate.  this means your interest rate will not rsie above a predetermined amount.