How an Open End Mortgage Works?

mortgages

With a mortgage or most other loans, you can choose an open or closed type of loan. Here is what defines these two types of loans and what characterizes them.

Closed Mortgage

A closed loan normally involves a lower interest rate than an open loan and a long term which can extend up to 25-30 years. What characterizes it, besides its popularity because of its lower interest rate, is the financial penalty if a person repays an additional amount on the balance. This is a loan sought after by those on a fixed budget who do not anticipate a substantial increase in income.

Open Mortgage

An open loan, on the other hand, has a shorter term and includes a higher interest rate. The advantage of the latter for the borrower is that he is able to repay the loan at any time, in whole or in part, without penalty. It is ideal for those planning to sell their home or expecting a large financial inflow in the short term.

Which mortgage to choose?

The choice becomes obvious if you do not believe you can apply for additional payments on the mortgage and want to take advantage of the lower interest rate with the closed loan. The challenge, in this case, is rather to choose between a short term or a long term.

Indeed, you will probably benefit from an increase in your income eventually, in the medium and long term. From then on, it will be possible to repay more of your mortgage. It is therefore beneficial to assess when this could happen and choose a term accordingly, to avoid paying unnecessary penalties when the time comes.

You may have unforeseen events along the way, such as an inheritance, and at that point, you will want to partially repay the loan to save on interest, but a penalty is imposed with the closed loan. This penalty may be higher than your savings in interest with the decline in the mortgage balance for the remainder of the term. If the penalty is higher, it will not be worth it and it will be better to wait for the renewal, at the end of the term, to make the changes.

It is the same if you wish to change the terms and conditions of your loan during an interest rate fluctuation in order to transfer for a fixed rate or a variable rate if this change allows you to pay less interest for the remainder of the term as the penalty cost.

In a context where an owner intends to sell his house in the short term, the question does not arise and he must opt ​​for an open loan. However, if the borrower chooses an open loan because he expects to partially repay the loan, without paying the balance in full, the challenge is to calculate whether the interest saved with the additional repayments is greater than the possible interest savings. with the lowest interest rate offered by the closed loan.

Choosing the right mortgage

Choosing the right loan requires an analysis of interest rates and their other charges; everything is compared because everything is converted into quantitative values. The open loan, the closed loan, the penalties… it is important to do the calculations well before rushing our actions because we are often inclined to act emotionally and we forget to really compare the interest costs and other charges. . The end goal is to invest your savings as much as possible in the capital of your mortgage.

By aamritri

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