Open Vs Closed Mortgages

March 24, 2023

Finding the right mortgage is a little more difficult than many buyers realize, as it’s more than accepting the first mortgage offered. It’s about finding a mortgage with great terms, a low interest rate, and the least expensive way to pay off a house as quickly as possible. Owning a home is a dream come true for many individuals, as it makes them feel they’ve finally made it, which is a beautiful feeling. However, finding the right mortgage can make the feeling even better when it’s a good fit for the family. Here’s what everyone needs to know if they’re comparing open and closed mortgages.

Open Mortgage Advantages

The open mortgage advantages are numerous, but the biggest advantage associated with this type of mortgage is the simple act of being able to pay off a mortgage as early as possible without paying any early payoff fees. Open mortgages are quite popular, if for no other reason than just the sheer flexibility of payment options. It’s possible to move the mortgage to a different type if a homeowner finds a lower rate elsewhere, and it’s easy to pay it off if they have the funds available. The advantage is not only being able to pay it off early if making bigger payments, but also being able to pay it off with a new loan if there is one available with a lower rate, if the home sells, or if something else occurs to enable the owner to pay it off. There are no early payment penalties, which is a big plus for any loan.

Of course, there are some disadvantages. Continue reading for details on these.

Open Mortgage Disadvantages

The major disadvantage of this type of mortgage is by far the interest rate. It’s a lot higher than the rates associated with other mortgages since there are no fees for paying it off early. It’s true buyers still pay less to pay off their home early than they do in interest rate fees, it’s still a turn-off for some borrowers. The rates are often variable, which means borrowers don’t know what might happen if the rates change and how much they change. This can be a good thing if the rates go down, but it can be an expensive change if rates rise significantly. Not all buyers want to saddle themselves with a variable rate mortgage that might fluctuate their payment and their overall cost of homeownership by thousands of dollars over the life of the loan.

It’s time to move onto learning about closed mortgages. Continue reading to reveal the advantages first!

Closed Mortgage Advantages

Closed mortgage advantages fall right in line with the interest rates they offer. The rates are fixed, which means homeowners know right away what they will pay monthly and over the life of their loan, and there will never be a change in their rate no matter what happens. Homeowners who want to know they are paying the same rate for the life of a loan love the attractiveness of a closed mortgage. Anyone settling down into their forever home will find this is the best type of mortgage for their family. Couples looking to buy a home and pay it off before they retire, families looking to raise their children in a home, and those who know they’ve found their forever home should opt for a closed mortgage to save money and live more comfortably. In some cases, lenders allow buyers to double their monthly payments without penalties if they choose a closed mortgage and wish to pay it off at an accelerated rate.

Once again, however, there can be some disadvantages. Keep reading to reveal and understand what these are and when they occur.

Closed Mortgage Disadvantages

Closed mortgage disadvantages are not bad for anyone who has found their forever home, but they are for those who move often. If a homeowner purchases a home using a closed mortgage, they are now responsible for paying penalties and hefty fees if they pay off or sell their home before the term is over. For instance, if a homeowner buys a home with a closed mortgage and a five percent rate and sells the home after five years, the rate might change for others in that time. If the interest rate is now a competitive three percent for lenders, the seller has to pay that difference. The lender is losing two percent, which is a big penalty for anyone who decides to sell early. The profit the homeowner makes is smaller after paying this penalty, which is a very unattractive feature for many buyers. The rate is called an interest rate differential, and it can be very expensive to sellers.

Continue reading to determine how to choose between the two types of mortgages.

Choosing Between Them

Both open and closed mortgages have their pros and cons, and choosing between them can be difficult for some buyers. The key for all potential buyers is to figure out what their family needs and wants. All buyers need to ask themselves is if they plan on living in this house for the long term. Is this their forever home, or does the buyer know they’d like to keep this house for a few years, sell, and move to the tropics? If the buyer knows they want to stay in this house for a limited time, it makes no financial sense to choose a closed mortgage with a potentially expensive interest rate differential. If the buyer wants to buy a home, pay it off, and retire in it without a mortgage, a closed rate is not a bad idea.

It’s all about what buyers are looking for. If buyers know this is not where they want to live forever, if they know their job could send them anywhere, and they know this house will not work with their lives forever, an open mortgage might be the better option. It’s a personal choice, and being educated on the pros and cons of both mortgage types is the way to choose the best rate, the best mortgage, and to save the most money.

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