For people who want to enjoy flexibility in their financial decisions, the selection between a closed or an open mortgage matters a lot. Opting for the right kind of mortgage may seem like a journey through a maze blindfolded. With the availability of different kinds of mortgages, it is difficult to identify how to begin and what can work in your favour.

Mortgages can be mainly categorized as either open mortgages or closed mortgages. The major difference between the two types of mortgages arises in the freedom of paying back the mortgage.  While both mortgages offer their own sets of advantages and rewards, a home buyer should consider different factors before opting for either one. These factors include their present job status, financial situation, and other monetary resources.

Open Mortgage

An open mortgage allows borrowers to pay off the mortgage, either partly or fully, any time before maturity. It is actually a mortgage with no penalties and rules. The terms involved in an open mortgage are usually short. For fixed rates, the mortgage terms vary from six months to a year. However, three to five years is the term for variable rates.

An open mortgage gives you the freedom to make additional payments whenever you have extra money.  Moreover, you can pay off the loan without incurring any prepayment penalty. Such a loan is extremely beneficial for those who have variable incomes such as self-employed individuals. It may also work in favour of those who expect improvement in income in the times to come and wish to repay their loan as quickly as possible.

Closed Mortgage

A closed mortgage makes you agree to terms that are based on the original span of mortgage. Its terms can vary from almost six months to ten years. It does not allow you to pay a lump sum amount or make prepayments without involving penalty payments. In some special cases, a closed mortgage can allow extra repayments of the principal amount.

A closed mortgage offers an interest rate that is much lower than an open mortgage. If you opt for a closed mortgage, make sure your broker gets the one with the maximum prepayment options. It can only be refinanced or renegotiated before it is matured as per its conditions. This type of mortgage is believed to be more stable because of its limiting nature.

While selecting the kind of mortgage you want, make sure to research your options to get better knowledge. Discuss your mortgage needs with your broker so that he/she can avail an option that best fits your interests.