The Difference Between Closed and Open Mortgages: Which One is Right for You?

What are the differences between closed and open mortgages? Which one is right for you? If you’re thinking of buying a home, you’re probably aware that there are different types of mortgage options available to you. However, with so many different mortgage types out there, it can be difficult to decipher which one is best for you. Understanding the differences between closed and open mortgages can help you decide which mortgage type is right for you. If you’re planning to buy a home soon and have been researching your mortgage options, chances are you have heard about both closed and open mortgages. This article explains what these two mortgage types mean and how they affect your financial future in different ways. Keep reading to learn more.

What is a Closed Mortgage?

A closed mortgage is a mortgage that is fully underwritten and funded with no remaining loan amount. Closed mortgages are typically used for purchase transactions where the buyer has sufficient funds for the down payment and closing costs. Closed mortgages are also known as conventional mortgages. Closed mortgages are typically more expensive compared to open mortgages because the underwriting process is more extensive and requires more documentation. Due to the extra risk involved in the underwriting process, closed mortgages have higher rates.

What is an Open Mortgage?

With an open mortgage, the amount of funds required to close the deal is less than the full loan amount. This means you have the option to increase the amount of the loan at a later date after you’ve acquired a better understanding of your financial situation. Open mortgages are usually offered by government-backed mortgage providers such as the FHA or VA. Open mortgages are sometimes referred to as assumable mortgages, which means that the person who takes over the mortgage can assume the original borrower’s rights and obligations related to the loan.

How Are They Different?

Closed mortgages have a fixed rate and term, meaning that the interest rate and loan term will stay the same for the duration of the loan. Open mortgages, on the other hand, have a fixed rate for the first 5–10 years, but the loan term is adjustable after the initial period, which means the loan term can be extended.

Open mortgages also allow for a refinance of the loan at some point in time.

Key Differences

Interest Rate: Interest rates for closed mortgages are typically higher than those for open mortgages. This is due to the fact that underwriters must take on more risk with an open mortgage, so they are compensated with higher interest rates.

Monthly Payments: A closed mortgage typically comes with a fixed monthly payment amount over the course of the life of the loan. An open mortgage, on the other hand, will not have a fixed monthly payment amount. Instead, you will be required to make monthly payments that will cover the interest and loan principle.

Repayment Methods: Closed mortgages usually have a fixed repayment plan that must be repaid over the course of 30 years. Open mortgages, on the other hand, have an adjustable repayment plan over the course of 20 years.

Equity: With a closed mortgage, you have positive equity in your home from day one. This means that you have equity in the amount of money in the home, plus any appreciation of the value of the home. With an open mortgage, however, you have negative equity in your home from the start. This means that you owe more money than the home is currently worth.

Closing Costs: Closed mortgages have higher closing costs than open mortgages. – Borrowing Power: With a closed mortgage, you have the full amount of borrowing power immediately upon closing the deal. With an open mortgage, you have limited borrowing power initially and can increase the amount of the loan at a later date.

Which One is Right for You?

Closed mortgages provide you with a fixed rate and provide you with a sense of certainty in the long term. However, you will have to pay higher monthly payments in order to cover the additional risk that is taken on by the lender.

Open mortgages are appealing to first-time homebuyers because they provide lower rates and a longer repayment period. You may have to pay more in the long term, but it may be worth it if you are short on cash.

As a general rule, if you are short on cash, have a low credit score, or have had a bankruptcy in the past, you may want to consider an open mortgage. Otherwise, a closed mortgage is likely the best choice for you.

Bottom Line

Closed mortgage and open mortgages each have their own set of pros and cons. It’s important to understand the differences between the two so you can decide which one is best for you. If you’re thinking of buying a home and need help deciding between a closed and open mortgage, you can always consult a mortgage lender to help you make the decision.

We here at Capital Mortgages look forward to assisting you with all your Ottawa mortgage needs. Ottawa open mortgages, or Ottawa closed mortgages, we can help. Contact us today by calling us at: 613-228-3888 or email us direct at: info@capitalmortgages.com

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