Everyone likes the option of an open mortgage, but is it really a good idea? The answer is yes, but only for the first year.

An open mortgage will allow you to pay down the full balance on your mortgage with no penalty. This kind of loan is usually offered only with a variable rate loan, or connected with a line of credit.

You would think that everyone would want to have an option like this yet they don’t. Why don’t they? It’s costly.

Lending institutions give the lowest rate to the borrowers from whom they know they will be earning interest for a certain period of time . They know this because the borrower guarantees that he will not pay down his loan and go to another borrower during a certain period of time.

So how much does an open mortgage cost?

The way you have the freedom to pay off your home loan at any time, and remove the guarantee the lender has that he will earn interest from you for a fixed time, the lender will need to have an increased up front earning.

If you compare a closed variable rate mortgage to an open variable rate mortgage, you will see that the closed rate mortgage can be offered as low as .75% below the prime rate. The open variable rate mortgage will usually be offered at the prime rate. Therefore, if the prime rate is 6%, the fixed variable will be 5.25% or maybe even lower, while the open variable rate will be 6%, maybe a little lower to 5.75%.

So does it pay to have an open mortgage?

Yes, if you plan on paying off your mortgage or switching to another lending institution within 12 months of getting the mortgage.

Let’s look at the options:

• Mr. A needs a $100,000 mortgage, and decides to do an open term mortgage because he plans to sell in 12 months. He is able to get the best open mortgage rate of prime less .25%, 5.75%. After 12 months, he will have paid $5,634.20 interest and the balance on the loan is $98,133.94.

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

So Mr. A with the open mortgage has paid $816.47 more in mortgage payments than Mr. B, even though Mr. B had to pay an interest penalty of $825.35. The expense of each of these loans is just about equal after 12 months.

What conclusion can be taken?

The open mortgage is a great idea if you want to avoid high early payment penalties. But you should only use it if you are relatively certain that the mortgage will be paid off within 12 months. If not, you are better off taking advantage of a fixed rate loan and risk a payout penalty.

You can see from these cases how important it is to choose a mortgage strategy that meets your own personal needs. Choosing the right strategy for you can mean major savings on your home loan.

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