Difference between Open and Closed Mortgage

Quick Summery

Some people are often confused about the two types of a mortgage; open mortgage, and close mortgage. Some may think that they have the same option and benefits, however, those are indeed different.

The main difference between an open mortgage vs a closed mortgage has to do with the ability to pay the mortgage during the agreed terms.

What is Open Mortgage?

An open mortgage is a type of mortgage that allows the principal to pay off their mortgage, or increase their monthly payments at any time, without having any penalties. It has no repayment restriction. 

An open mortgage has a shorter period of time compared to a closed mortgage, the period may vary from six months to a year at least. But the interest rate comes a little higher due to the repayment flexibility.

What is a Closed Mortgage?

A closed mortgage (also referred to as a locked system) is a type of mortgage that cannot be prepaid, renegotiated, and refinanced without a penalty charge. A closed mortgage plan comes with a much lower interest rate. It also allows you to pay the principal amount in different payment options and depending on your availability.

A closed mortgage benefits you, if you want fixed monthly payments. It might help with your budgeting of expenses such as your electric bills, groceries, water, etc.

Which Mortgage is The Best for You?

Most people in Canada have chosen a closed mortgage plan because of its affordable monthly interest rate rather than the open mortgage plan. Also, the advantage of choosing a closed mortgage plan rather than an open mortgage is the time period. The range of closed mortgage plan is from 6 months up to 25 years. Which means you won’t hurt your savings much by paying on your monthly interest rate. It is depending on your financial situation. 

If you are likely to sell your home during its term and you are expecting to get the extra money that could pay off your mortgage soon, an open mortgage is the right plan for you. An open mortgage plan can be paid in full, at any time, without having any penalty. If any penalty comes out, it will only be a little charge.

So generally, an open mortgage is suitable when you expect on getting extra income or an influx of cash (i.e. salary increase, inheritance, etc.) and plan to sell your home during the term. While a closed mortgage works best when your situation is not anticipated during the terms. 

Before making a decision, think about: 

  • Your ability to pay a monthly interest rate 
  • If you will be in a position where you can pay your mortgage off early 
  • Your monthly income and expenses (you need to ensure that you don’t go into debt with a mortgage that you are not able to manage or afford) 
  • Do you target to sell your home before its maturity or you expect to pay your mortgage until the end terms?

These are the things you need to consider before choosing a mortgage plan, or you can discuss it with a licensed mortgage professional.

How to Get a Mortgage with Bad Credit?

Borrowers with bad credit often get financing, affordable interest rates, and charges. When you have bad credit for a home loan applications might cause you big bucks when you finance.

It is difficult to get a loan with poor credit, however, there is a mortgage broker who works with these kinds of situations. 

Find a co-signer, a friend or family member, who has good credit and would be capable of paying your mortgage if you default.  

Make a larger down payment, your score may not be at the ideal score, but lenders will often accept your application if you pay a larger down payment.

Look for the first-time home buyers program, this program is for first-time home buyers who cannot afford to have their own home. However, you may qualify still, even if you owned a property before. You may contact lenders or mortgage broker for more details.

Final Thoughts

A better understanding and knowing where you stand will give you an idea of which type of mortgage is right for you. It’s important to get the right mortgage plan, you will be able to save a hundred or even a thousand dollars.

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