Open Vs Closed Mortgages

Closed Mortgage Disadvantages

Closed mortgage disadvantages are not bad for anyone who has found their forever home, but they are for those who move often. If a homeowner purchases a home using a closed mortgage, they are now responsible for paying penalties and hefty fees if they pay off or sell their home before the term is over. For instance, if a homeowner buys a home with a closed mortgage and a five percent rate and sells the home after five years, the rate might change for others in that time. If the interest rate is now a competitive three percent for lenders, the seller has to pay that difference. The lender is losing two percent, which is a big penalty for anyone who decides to sell early. The profit the homeowner makes is smaller after paying this penalty, which is a very unattractive feature for many buyers. The rate is called an interest rate differential, and it can be very expensive to sellers.

Continue reading to determine how to choose between the two types of mortgages.