One of the most important aspects of getting a mortgage is selecting a mortgage that is right for you in the first place. The type of mortgage you end up getting can play an important role in your future.
For example, if you break your mortgage contract, then your lender may charge you a fee. If you wish to sell your property after breaking your contract, then that can result in significant penalty fees. Additionally, there may also be fees if you choose to pay off your mortgage early.
That’s why it is important to consider the flexibility of your mortgage. This flexibility can depend on, for example, whether or not the mortgage is an open or closed one, if it’s portable, or if it’s assumable.
What are open and closed mortgages?
An open mortgage can provide more flexibility in the case that you wish to put more funds toward your mortgage. For example, if you have plans to pay off your mortgage sooner than later, then an open mortgage may be the better option. Another scenario in which this option should be considered is if you wish to sell your property in the near future.
As for closed mortgages, the interest rate for them may be lower compared to open mortgages. This type of mortgage typically involves a limit on how much extra funds, known as a prepayment privilege, that you can put toward your mortgage as well.
However, it should also be noted that not all closed mortgages encompass prepayment privilege. A closed mortgage may be the right choice for you if, for instance, the prepayment privileges are flexible enough for any funds you wish to put toward your mortgage, as well as if you have plans to stay with your property for the term of your loan.
What are portable and assumable mortgages?
Let’s say that you wish to sell your property in order to purchase another one. What a portable mortgage does is let you transfer your current mortgage in terms of its balance, terms, conditions, and interest rate. A portable mortgage may be a good option for you if you’re interested in avoiding prepayment penalties in the case of breaking your mortgage contract. You can also think about opting for this mortgage option if you are in good terms with your current mortgage.
Meanwhile, an assumable mortgage lets you assume someone else’s property and mortgage. This also works the other way around. It should be noted that the original mortgage also remains the same. This type of mortgage can be considered if, for example, you’re a seller who wishes to avoid prepayment penalties while you have plans on moving into a property that costs less. An assumable mortgage can also be useful to you if you’re a buyer and the interest rates have increased after obtaining your mortgage. While variable-rate mortgages cannot be assumed, most fixed-rate mortgages are the opposite.