Open vs Closed Mortgages: Which is Right for You?
Are you considering buying a new home? If so, you already know there are many different factors that need to be examined before you can finalize a purchase. Not only do you need to find the perfect home, but you also need to choose the type of mortgage that is best for you. Unfortunately, this can be an overwhelming process if you are not knowledgeable about real estate or mortgage loans.
While there are several different types of home mortgage loans to select from, the first thing you will need to decide is whether you want to get an open mortgage or a closed mortgage. In the simplest of terms, the primary difference between the two is the fact that you can pay off an open mortgage at any time without being penalized. With a closed mortgage, on the other hand, you will be penalized if you pay off the mortgage prior to the end of its term.
Interest rates can be quite different between the open and closed mortgages. An open mortgage typically will have a higher interest rate than an mortgage that is closed. The term length can also be quite different. An open mortgage could have a term length of a year or less while a fixed or closed mortgage could be terms of up to 10 years.
If you are interested in the possibility of pre-paying your mortgage loan, but you do not want to pay the higher interest rate associated with an open mortgage, be sure to discuss the pre-payment policy with the lenders you are considering. Since many lenders will allow you to pre-pay up to 20% of the original principal balance each year without incurring a penalty, this might be the better option for you.
If you are likely to move before a fixed mortgage term will expire than perhaps you will want to consider an open mortgage more closely. While the interest rates of a closed mortgage could be quite a bit lower than those of an open mortgage, a closed mortgage could leave with a hefty penalty should you have to break the term prematurely. The penalty amount you pay is dependent on the current posted interest rate. If your rate is lower than the penalty will be 3 months interest. But if you rate is higher than the posted rate the payout penalty could be thousand as then they will use the IRD or Interest Rate Differential to calculate your penalty which considers the amount of time left in your term and the loss of interest the bank loses if they let you out of your term early.
Tyler Tost has been a Calgary Mortgage Broker for the last decade. He specializes in residential Calgary Mortgages and offering the best rates and mortgage options to his clients.
