There is so much to learn about buying a home, and let’s face it, dry and boring finances can easily be cast aside as you explore the features of HVAC systems, paint chip shades and new schools for the kids.

But the type of mortgage you choose is an important step forward in how to properly finance your future. Let’s take a look at the difference between a closed and open mortgage.

Closed

These types of mortgages are appealing because the interest rate is always lower than an open mortgage. They also offer longer terms as well. If you’re looking to save money on your monthly loan payments this may be your best bet. Usually, those who select a closed mortgage are homeowners whose income is relatively set. Borrowers who pick this type do not plan on paying off their mortgage in the short term.

This is not the type of mortgage you would take if you were expecting a big inheritance or other significant increase in your income. The reason for this is because you will face a penalty if you try to pay off a portion of or your entire mortgage. And the penalties can be high. If you can, you’re best to wait until the renewal term of your mortgage comes due before making any changes.

To be fair, most lending institutions are not as severe as they once were when it comes to paying off or paying down your mortgage. Most permit some kind of allowance that lets you pay off a certain portion or percentage of your mortgage without penalty.

Open 

This type of mortgage offers a higher interest rate and shorter borrowing terms but it has a kind of flexibility that is important to some borrowers. The beauty of this kind of mortgage centres on the fact that it lets the borrower pay back the mortgage or part of it without penalty. An open mortgage is perfect for those who plan to sell their house or who are soon anticipating a significant infusion of money and planning to pay down their mortgage debt with it.

These mortgage rates tend to be variable, which is another benefit. You can move into another mortgage product at any time if you decide a variable open mortgage is not suitable for you.

Sources: www.creditfinanceplus.com, www.youngandthrifty.ca, www.lowestrates.ca