Part 1: Open or Closed
Despite the proliferation of information regarding mortgages, there’s still a lot of confusion about what’s the best deal.
Unfortunately choosing the best mortgage really does depend on your specific circumstances: your job security, current and future rates, payment options, payout penalties, flexibility, and various reward options.
But in an effort to add a bit of clarity, I thought it might help to define a few key terms, while providing a bit of guidance on the best mortgage for specific circumstances. However, because this topic can get quite lengthy, I’ve split this information into three posts. Part 1: Open vs. closed. Part 2: Fixed vs. variable. Part 3: Other considerations. So, read on to find out what’s the best mortgage for you.
Open Vs. Closed
First, you’ll need to decide between an open or closed mortgage.
Closed mortgages require you to commit to a specific period of time (known as a term). If you try and close, change or pay-off a closed mortgage before the term ends you will be charged a penalty.
Open mortgages, on the other hand, allow you to pay off all or part of the loan at any time, without penalty. But, for this privilege, you’ll end up paying more up front—meaning a higher interest rate.
To help you make the choice between an open and closed mortgage answer the following questions:
1) Do you plan (or expect) to move/sell your home before the mortgage term ends?
2) Do you expect a large sum of money, such as an inheritance, within a predictable (and short) period of time?
3) Are you carrying a mortgage for a smaller sum because of tax considerations? (But, you have the ability to pay off the mortgage should the need arise?)
4) Did you buy the home as an investment with the intent of flipping/selling it within a short period of time?
If you answered yes to any of the following, then consider an open mortgage. For just about everybody else, look at closed mortgage options.
Next: Part 2: choosing between fixed and variable rate mortgages.