Open Mortgages

While the reasoning behind an open mortgage is sound, the reality is, most people will never utilize the benefits. We have it in our heads that the very possibility of paying a penalty will render us powerless and forever indebted to our lender. The truth of the matter is, an open mortgage can be more costly than a closed mortgage if you don't have the means to pay the entire principal. Unfortunately, many homeowners are sitting on an open mortgage with no possibility of paying the balance off before the term expires. When it comes to interest rates, open mortgages have higher rates than closed mortgages.

The difference between a closed mortgage and an open mortgage is simple. If you pay off your closed mortgage beyond the accepted amount, you pay a penalty, whereas with an open mortgage, you don't. If you are certain you are coming into enough money to pay off your entire mortgage, then by all means, go open. However, if you fall into the majority that might be able to swing a little extra towards the principal, closed will offer you a lower interest rate, along with prepayment privileges.

The prepayment option available on most closed mortgages can range anywhere between ten and twenty percent of the principal each year. Ten percent of a $200 thousand mortgage translates into an extra twenty thousand dollars that can be paid toward the mortgage every year with no penalty. That's usually plenty for the average homeowner, decreasing the length of the mortgage and thereby saving thousands of dollars in interest over the long run.

If your lender hasn't explained the difference between open and closed mortgages, you should do your own analysis before committing one way or the other. A few simple questions will tell you if an open mortgage is really the best option for you.

1. Will I be able to pay off the entire balance before the term expires? If the answer is a definite yes, then an open mortgage will save you the penalty.
2. Am I expecting a windfall of cash? An inheritance, sale of other assets or property could allow you to pay more than the prepayment amount in one shot. Ask what the penalty would be on a closed mortgage and compare it to the interest you'll pay on an open mortgage. There is a multitude of online mortgage calculators to help you compare exactly how much your interest costs will be over the term when you make extra payments. Don't forget to add the penalty amount to the total cost of the closed mortgage.
3. Will I be forced into breaking the mortgage before the term ends? Planned work relocations and expanding families often mean you will end up breaking your mortgage. However, talk to your lender about a portable mortgage and you can avoid breaking it.
4. Am I looking for a new lender or bank? If you've already been pondering a change in lenders, open mortgages allow you to transfer your mortgage without penalty. Even if you are at the end of your term, you can renew your mortgage for six months open, to give yourself time to make the switch.

Don't be afraid of the interest rate on a six-month term, which could be surprisingly high. Remember, it's extremely short term, saving you thousands of dollars in penalties and giving you complete control over what you do with your mortgage.