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Difference Between Open and Closed Mortgage

houseOpen Mortgage vs Closed Mortgage
There are two different types of mortgages ‘“ open mortgage and closed mortgage. Some differences exist between the two types but often people get confused.

The main difference between the two types of mortgage is in the payment term. In a closed mortgage, you are committed to the mortgager for a specified period of time. It is often referred to as a locked system. In this locked system, you will be able to pay off your mortgage only when you sell off the property. On the other hand, open mortgage is not that strict. In this mortgage system you can pay off the mortgage without any penalty charges at any point of time.

Open mortgages are for shorter periods than closed mortgages. The time period can vary from six months to a year. But the interest rates are higher for open mortgage system. In closed mortgage systems, you cannot refinance or negotiate on the mortgage before you reach the end of the term specified. And if you want to renew the mortgage, you will have to pay a penalty charge. The penalty charge is decided by the mortgage lender and it can be an interest for a period of time or the interest rate differential amount. Some closed mortgage systems let you avail certain benefits of open system like the different pre-payment options.

An advantage of choosing a closed mortgage plan over an open plan is the time period. The plans can range from 6 months to 25 years. But if you choose a variable open plan, you can get the term of the mortgage up to 2 years. In a closed mortgage plan, you can pay the principal amount in different payment sets, depending on your convenience.

Closed mortgage plans are more secure. Open plans can be affected by the market conditions owing to the short span and high interest rates. But open plans are more flexible than the closed plans. In an open plan, you can get freed off from the loan at any time without making any penalty payments. Though the interest rate is high in an open plan, you can at times save pretty good amounts as the term is less. Comparing it to closed plans, you will have to pay the interests for a longer period of time, which may total close to the open plan’s interest amount at times. Good times to opt for open mortgage plans are when you have a financial uncertainty or you expect that the interest rates will drop.

1. Closed mortgage plans are longer in duration than open plans.
2. The interest rates are higher in open plans than in closed systems.
3. Due to the flexibility of the open mortgage plans, you can close the plan at any time without paying any penalty amount.
4. In a closed system, you cannot refinance the mortgage before the end of the term.

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