An open mortgage and a closed mortgage are two types of mortgage agreements that differ primarily in their flexibility regarding repayment.
Open Mortgage
An open mortgage allows the borrower to pay off the entire loan amount, refinance, or renegotiate at any time during the mortgage term without incurring any prepayment penalties.
- Flexibility: Borrowers can make additional payments or pay off the mortgage in full whenever they choose, making it suitable for those who may receive a financial windfall, such as an inheritance or bonus.
- Interest Rates: Typically, open mortgages come with higher interest rates compared to closed mortgages due to this flexibility.
- Ideal For: This type of mortgage is beneficial for individuals planning to sell their home soon or those expecting to make significant payments towards their mortgage in the near future.
Closed Mortgage
A closed mortgage restricts the borrower from paying off the loan in full, refinancing, or renegotiating without facing a prepayment penalty.
- Payment Structure: While some closed mortgages allow for limited additional payments or increases in regular payments, any significant changes usually trigger penalties.
- Interest Rates: Closed mortgages generally offer lower interest rates than open mortgages, making them a more cost-effective option over time for borrowers who do not plan to pay off their mortgage early.
- Ideal For: This type is suitable for borrowers who want predictable monthly payments and do not anticipate needing to pay off the mortgage before its term ends.