If you want to make large payments on your mortgage or pay off the entire mortgage without penalty, then an open mortgage is for you. An open mortgage offers maximum flexibility. These homeowners are willing to pay a higher interest for the flexibility of paying off the entire mortgage before the term is complete.
A closed mortgage is a commitment with a pre-determined interest rate, over a pre-determined period of time. A buyer who uses a closed mortgage will likely have to pay the lender a penalty if the loan is fully paid before the end of the closed term.
Fixed Rate Mortgage
When you agree to a fixed rate mortgage, your interest rate will never change throughout the term of your mortgage. There are no surprises as you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at the end of your term. Fixed rates are usually preferred by first time buyers and those borrowers looking for payment stability.
Variable Rate Mortgage
When you agree to a fluctuating interest rate for the length of the term, then you have a variable rate mortgage. Interest rates fluctuate with the bank’s prime lending rate, and may vary from month to month. When interest rates change, your payment amount could remain the same, however the amount that is applied to the principal will change. The variable rate mortgage is a good option for homeowners who believe that interest rates are currently high and will drop.
This type of mortgage allows older consumers to convert their home equity into cash, generally for living expenses. At the end of the loan period or upon the death of the borrower, the loan balance and accrued interest is due, which is usually settled by the heirs who sell the property to meet the outstanding obligation.