Open Mortgage

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Definition

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.

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LAYMEN TERMS

You decide to buy an object XYZ, you don't have enough money so you take the open mortgage to buy the object. You bought the object and start paying back the loan money that is the mortgage timely. Suddenly, you own a lottery and get a huge amount of money! Since now that you have the required money to buy XYZ, you decide to pay the back the loan by giving this extra money to the lender. Thus, you don't have any loan on you and also you can enjoy the object that you bought recently without any worries. This flexibility is the main feature of an open mortgage.

HOW DOES THIS TERM APPLY TO YOU

In case you are a businessman and you buy a house with an open mortgage. You chose open mortgage knowing that your income varies from time-to-time; you earn more or gain profit when the market is right and at some other times when the market is low, you get into lose no matter how hard you work. You bought the house this year with a view that in the coming months, you plan to sell some part your business and hence you’ll gain extra money. This extra money you plan to put towards your current open mortgage so as to pay off the mortgage as fast as possible.

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