Is it a good idea to choose an open mortgage? (hypotheque)

If you are thinking about an open mortgage (taux hypothecaire) because you like the idea of the freedom of paying it off when you need to, make sure you understand the total costs.

An open mortgage will allow you to pay off your loan balance with no penalty; usually, however, this kind of loan is only available as a variable rate loan, or together with a line of credit.

If this option offers such freedom, you may be surprised that not all borrowers take advantage of it. The reason that they do not is because it is too expensive.

Banks and other lenders offer the lowest rate to borrowers whom they know will be keeping the loan with them for a certain period of time. Without a guarantee such as this and borrowers can go to another lender at any time, lenders will add a premium to the rate to adjust for the lost income - taux hypothecaire.

Just how much difference is there?

If you want to have the option of paying off your mortgage at any time, the lender will adjust the home loan rate so he will guarantee he earns a higher rate from the beginning of the loan - hypotheque.

Make a comparison of a closed variable rate mortgage to an open variable rate mortgage, and you will observe this. A closed variable rate mortgage is typically offered at .75% lower than the prime rate, and even lower in some cases. An open variable rate mortgage is offered at prime, or maybe a bit less. Let us say that the prime rate is 6%; the fixed variable rate mortgage will be 5.1% to 5.25 %, while the open variable rate mortgage will be between 5.75% and 6%.

When does it make sense to take an open mortgage? - taux hypothecaire

It is sensible if you plan on paying off your mortgage or moving it to a different bank within the next 12 months.

For example:

• Mr. A takes a $100, 000 home loan (pret hypothecaire) on an open term because he plans on paying the loan off in 12 months when he sells his rental property. His rate is 5.75% (prime less 0.25%). At the end of 12 months he has paid $5,634.20 in interest and his balance is $98,133.94.

• Mr. B decides upon a closed variable rate mortgage in the same amount of $100,000 and he is able to get prime less .90% iii, or 5.1%. At the end of his 12 months, he can pay off the loan with a penalty of two months interest ($825.35). But, he has only paid $4,999.70 interest over the period of the loan, and his loan balance is $97,951.97

Mr. A (with an open mortgage) has paid $816.47 more for his home loan despite Mr. B having paid an interest penalty of $825.35. The cost of each mortgage becomes practically equal after 12 months.

Conclusion:

An open mortgage (pret hypothecaire) can be astrategicmortgage tool that can prevent high early payout penalties. It should, however, only be considered if the chances are very high that the home loan will be paid out in the next 12 months. If the mortgage is not expected to be paid out within that time allotment (13 months or more) it is a better idea to take the fixed rate mortgage and pay the payout penalty.

Taking the time to choose the right home loan strategy that is personalized to your specific needs can result in big savings.

Article Source: http://www.christiannotepad.com

Gregory is an Accredited Mortgage Professional (AMP). To get more information on Mortgage Loans - pret hypothecaire, visit: Hypotheque - Mortgage Intelligence