Open vs Closed (mortgage types)
In addition to the interest type, the mortgage type or term of the mortgage can
have a significant impact on the amount of your monthly payment as well as the amount
of interest you will pay on the principal. The term, or length of time over which
a loan is paid back, can vary from as little as six months to as long as fifteen
to twenty years. Once the end of the term is reached, the mortgage can be renegotiated
if the buyer choses. There are two common types of mortgages “open” and “closed”
which are explained below.
Open Mortgage
An open mortgage means that the loan can be paid back partially or in full without
incurring any penalties. The mortgage can also be renegotiated if market conditions
or your financial situation shift. Although an open mortgage provides more options
and opportunities for life adjustments, this comes at a cost, as the interest rates
for this type of loan tend to be higher. For those able to make larger payments
or who plan on selling their home within a short period of time; however, an open
mortgage can be a solid choice.
Closed Mortgage
The advantage of a closed mortgage is that the interest rates tend to be lower,
but options are limited. Typically a homeowner may make extra payments or larger
payments as long as the sum of the payments does not exceed a set amount determined
in the loan agreement. Payments exceeding the agreed upon amount; however, would
incur penalties.
Although most buyers will elect to choose a closed mortgage, there are advantages
to choosing the open mortgage. For instance, if market conditions are expected to
change, the type of mortgage should be balanced against the type of interest rate
so that as the buyer your needs are.
