In addition to the interest type, the mortgage type or term of the mortgage can have a significant impact on the amount of your monthly payment as well as the amount of interest you will pay on the principal. The term, or length of time over which a loan is paid back, can vary from as little as six months to as long as fifteen to twenty years. Once the end of the term is reached, the mortgage can be renegotiated if the buyer choses. There are two common types of mortgages “open” and “closed” which are explained below.
An open mortgage means that the loan can be paid back partially or in full without incurring any penalties. The mortgage can also be renegotiated if market conditions or your financial situation shift. Although an open mortgage provides more options and opportunities for life adjustments, this comes at a cost, as the interest rates for this type of loan tend to be higher. For those able to make larger payments or who plan on selling their home within a short period of time; however, an open mortgage can be a solid choice.
The advantage of a closed mortgage is that the interest rates tend to be lower, but options are limited. Typically a homeowner may make extra payments or larger payments as long as the sum of the payments does not exceed a set amount determined in the loan agreement. Payments exceeding the agreed upon amount; however, would incur penalties.
Although most buyers will elect to choose a closed mortgage, there are advantages to choosing the open mortgage. For instance, if market conditions are expected to change, the type of mortgage should be balanced against the type of interest rate so that as the buyer your needs are.
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In addition to the interest type, the mortgage type or term of the mortgage can have a significant impact on the amount of your monthly payment as well as the amount of interest you will pay on the pr