Open Mortgage

If you secure an open mortgage, you can make larger extra payments on the loan without having to pay the lender pre-payment penalties. While the interest rate on this type of loan is higher than comparable closed mortgages, there are times when this is the better choice.

Types of Open Mortgages

The term for an open mortgage may be anywhere from six months to five years in duration.
Amortization of the mortgage may be arranged for up to 35 years.

Lenders offer open mortgages with variable. The schedule of payments, depending on the lender, may be arranged for anything from weekly, bi-weekly, semi-monthly to monthly.

Most lenders have a minimum mortgage amount of $10,000-50,000.

Benefits of Open Mortgages

Lower Penalties

Because open mortgages allow you to pay down your mortgage at the rate you want to without the usual penalty, it gives you more freedom to manage your money in the way you need to. While there isn’t the standard prepayment penalty, it is important to check the fine print. Many open mortgages do charge administrative fees for borrowers who pay their mortgage off too early within the term.

For example, the lender may charge $500 for early full payoff within the first year and $250 for payoff of the principle within the second year. It isn’t until the third year that the borrower can truly pay of the mortgage without additional costs involved.

More Flexibility

Some jobs require frequent relocations. For someone in this situation, the penalties on a closed mortgage quickly erase any benefits gained from having a lower interest rate. For anyone who anticipates the need to sell their home before their term expires, the flexibility offered by an open mortgage is the better choice.

Those who work on commission may find that an open mortgage works better as it allows the borrower to make lump payments above and beyond their basic payment schedule when commissions come in.

The self-employed small business owner may also find that an open mortgage offers the level of flexibility required. At times when business income is slow, the borrower only has to make basic payments, possibly interest only. When business income picks up, the borrower pays extra on the mortgage to reduce the principle, which effectively reduces the interest if another slow period occurs.

Strategies for When to Use an Open Mortgage

Financial experts recommend using open mortgages when interest rates are high, then converting to longer term mortgages when rates start to decline.

Because none of us know what the future holds, open mortgages are attractive for the very reason that if the unexpected happens, such as a job relocation, the borrower doesn’t have to worry about losing any savings gained through a lower interest rate to prepayment penalties.