What’s the Difference Between a Closed and Open Term Mortgage?
If you’re the type that isn’t comfortable just handing off all your mortgage activities to someone else without having a hand in them, you’ll want to know about closed and open mortgages, so you’re better informed. This aspect may seem relatively minor once you’ve been approved and have the house, but it can make a big difference if you have thoughts of paying your mortgage off sooner than you need to.
Closed Mortgage
If you opt for a closed mortgage, you will make set payments throughout the term of the mortgage. You’ll have a few options regarding how often the payments come out, but they will be the same each week, bi-weekly or monthly.
Also, when you select a closed mortgage you aren’t able to pay off your entire mortgage early without paying a penalty. This is significant if you come into a large sum of money, or if you sell your home at some point and pay it off early before you move.
Closed mortgages typically carry lower interest rates, and if you aren’t planning on paying it off early they are usually the better option for the typical home buyer. Some lenders offer convertible closed mortgages, which give you the same benefits as a regular closed mortgage, but you can convert it to a longer term without incurring prepayment charges.
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Open Mortgage
If you have a plan to pay off your mortgage in the near future, an open mortgage is probably the better option. With an open mortgage, you can pay off portions of your home or the whole thing, without any worrying about prepayment charges.
It’s possible to convert an open mortgage to any other term without prepayment charges, whenever you want. Since there is so much prepayment flexibility with open mortgages, the interest rates are typically higher than with closed mortgages.
Length of the Term
The length of your mortgage term is another element you’ll have to consider when working out all the details. The term refers to the number of years that your mortgage rules and parameters are in effect.
A long term mortgage term generally refers to a term that is longer than 3 years. If you currently have a 5 year term, then you are in a long term mortgage. On the other side, a short term mortgage refers to a term of less than 3 years.
Typically, a long term mortgage has higher interest rates because you have the security of knowing you are paying a certain rate for a specific number of years. With a short term mortgage, your rates are lower because you don’t have the same type of security and may have to accept higher rates if they increase by the time your term is over. Some people choose short term mortgages if they believe the rates will drop by the maturity date.
A Team Effort
It’s not uncommon for all the mortgage talk to get a little confusing for the average person, which is why a reputable mortgage broker can make the process so much easier. Together, you can work as a team and they can go out and find you the terms that best suit your situation and your lifestyle.
License: Royalty Free or iStock source: www.shutterstock.comI am Eric Jones, a businessman by profession. Business and entrepreneurship are my passion and I love researching on the various aspects of those areas. I make sure that I don’t miss out any updates and for this reason I read quite a lot. Law is yet another area which I am passionate to know more about.
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