Now that you have decided to buy a house, the first question most home buyers want to be answered is: “What is the best mortgage for me?” It seems easy to get mortgage approval because you meet all the requirements, right? Not exactly. When it comes to choosing a mortgage that’s right for you, there are many possibilities. In this latest article, let’s highlight four key differences of open vs. closed mortgages for you to review.
1. Duration of mortgage
One of the differences between open and closed mortgages is the duration. Open mortgages are usually short-term periods that last between 6 months to 5 years. On the other hand, a closed mortgage offers the security of fixed payments from 6 months to 10 years. Those who are planning to sell their home and move within 5 years should choose an open mortgage. For homeowners who plan to live at their house and settle down for more than 5 years, a closed mortgage is a better solution.
2. Interest rates
An open mortgage is flexible with mortgage payments. It allows you to repay in part or in full any time without charging penalty fees for early repayment. However, they have high-interest rates. A closed mortgage offers a lower interest rate and a mortgage timetable of payment dates. It’s important to note that, unlike open mortgages, if you pay more than the agreed amount before the maturity date, you will be charged penalty fees. With closed mortgages, if you have a set income or salary, this would be a better option because you would pay lump-sum prepayments
When it comes to open mortgages, homeowners get complete payment flexibility, as the whole mortgage balance can be paid off at any time without facing penalty fees. But we have to reiterate: open mortgages come with higher interest rates and be prepared to pay the prime rate, plus a larger premium. With closed mortgages, borrowers get lower interest rates, but limited flexibility.
4. Penalty fees
Penalty fees tie in with flexibility. For those with open mortgages, you can avoid penalty fees if you decide to sell your home. In other words, it has no prepayment restrictions. In comparison to closed mortgages, once you make the commitment to its terms and conditions for the duration, if you decide to sell, be prepared to pay penalty fees.
As you can see, deciding to get an open or closed mortgage should be weighed against its pros and cons and your circumstances, such as your income, how long you plan to stay at the property, and payment flexibility. But once you make the decision, you’ll be a brand new homeowner.
At Northwood Mortgage, we have an expert staff of mortgage agents specializing in open and closed mortgages in Toronto, Brampton, Mississauga, and the GTA. We take the time to assess your needs and cater to our mortgage services to accommodate all clients.
If you would like more information on open and closed mortgages or first mortgages in Toronto and the GTA, we invite you to book a FREE consultation with one of our Northwood Mortgage agents by calling 416-969-8130 ext. 111, toll-free at 888-492-3690, or contact us here. Once we receive your request, one of our mortgage agents will contact you within 24-48 hours to arrange an appointment.