Many clients have asked me about an "open mortgage".
An Open Mortgage is a mortgage that can paid off completely without a penalty. Sounds good right! It might be! But it is good to consider other options.
Flexibility comes at a price. Open mortgages are more expensive than closed mortgages. An open mortgage could have a higher interest rate by 1%. That 1% will cost a borrower thousands of dollars over 1 year only!
A closed mortgage usually is at a lower interest rate. You can often get out of these mortgages early, but it is at a price. That mortgage penalty can be reasonable or it can be sky high.
The question of an open mortgage versus a closed mortgage is about the borrowing costs (the interest rate) versus the penalty to get out of a mortgage.
An example of a good reason to have an open mortgage:
You have your home up for sale and need to renew your mortgage while you are waiting to sell your home. In the short term, the open mortgage might be the less expensive option.
In other scenarios, an open mortgage is not necessarily the best choice.
For example: A borrower is expecting an inheritance of $200 000 that is taking a long time for probate. Once that borrower receives the $200 000, then he/she will pay down their $300 000 mortgage by $150 000. The borrower might be well advised to renew their mortgage on a 1 year fixed term while waiting. 1 year term interest rates are quite low. In the meantime, when the inheritance comes in, the borrower might be able to pay off $60 000 without penalty. And then when renewal time comes, the borrower can pay off the other $90 000!
Remember that there are no penalties to pay if you pay down your mortgage at renewal time.
People’s situations are constantly changing these days, and sometimes they need flexibility. An open mortgage could offer that flexibility, but be sure to explore other options that could save you money. A quick call and I can provide you with the cost of your mortgage depending upon your unique circumstances.
Flexibility comes at a price. Open mortgages are more expensive than closed mortgages. An open mortgage could have a higher interest rate by 1%. That 1% will cost a borrower thousands of dollars over 1 year only!
A closed mortgage usually is at a lower interest rate. You can often get out of these mortgages early, but it is at a price. That mortgage penalty can be reasonable or it can be sky high.
The question of an open mortgage versus a closed mortgage is about the borrowing costs (the interest rate) versus the penalty to get out of a mortgage.
An example of a good reason to have an open mortgage:
You have your home up for sale and need to renew your mortgage while you are waiting to sell your home. In the short term, the open mortgage might be the less expensive option.
In other scenarios, an open mortgage is not necessarily the best choice.
For example: A borrower is expecting an inheritance of $200 000 that is taking a long time for probate. Once that borrower receives the $200 000, then he/she will pay down their $300 000 mortgage by $150 000. The borrower might be well advised to renew their mortgage on a 1 year fixed term while waiting. 1 year term interest rates are quite low. In the meantime, when the inheritance comes in, the borrower might be able to pay off $60 000 without penalty. And then when renewal time comes, the borrower can pay off the other $90 000!
Remember that there are no penalties to pay if you pay down your mortgage at renewal time.
People’s situations are constantly changing these days, and sometimes they need flexibility. An open mortgage could offer that flexibility, but be sure to explore other options that could save you money. A quick call and I can provide you with the cost of your mortgage depending upon your unique circumstances.
