An open mortgage is a mortgage with no limitations on prepayments. The interest rate on open mortgages is usually higher; however, it gives the greatest amount of flexibility to pay off the mortgage faster. The interest rates are higher because one can make payments towards the mortgage on top of the regular payments. It provides an individual the flexibility to make the prepayments at any time, even leading to the loan pay off before the end of the mortgage term with no prepayment penalty.
With open mortgage, one can also renegotiate the mortgage before its term end and break the contract to change lenders. An open mortgage term ranges from 6 months to 1 year for fixed rates, and 3 to 5 years for variable rates. A few open mortgages also allow an individual to convert an open mortgage to a closed mortgage without any penalty if needed.Explore Definition
Under the following circumstances, an individual may consider to get an open mortgage which could be beneficial:
- If one hopes to pay off the mortgage soon
- If one’s income varies from time-to-time and not fixed
- If one receives a sudden large amount of money unexpectedly by winning a lottery and decides to put that extra money towards the mortgage
- If one is uncertain about how long he or she will require a mortgage; open mortgage will allow the homeowner to pay off the balance without paying prepayment penalties
- If one expecting a large influx of money to pay the mortgage – say by selling a business or another property or inheritance, etc.
The disadvantage of open mortgage is the higher mortgage you will have to pay in case of an interest rate increase.