If you are thinking about an open mortgage (pret hypothecaire) because you like the idea of the freedom of paying it off when you want, 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 offer their lowest rates to borrowers who commit to paying their mortgage for a fixed period of time - taux hypothecaire. They do this because they have a guarantee that the loan will not be paid off (or taken to an other lender) for a certain length of time.
Just how much difference is there?
If you want to have the freedom to pay 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 - pret hypothecaire.
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% below the prime rate, and even lower in some cases. An open variable rate mortgage is offered at prime, or maybe a little 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%.
Does it make any sense to have an open mortgage? In some situations, yes.
If you are sure you will be paying off your mortgage or changing your loan in 12 months, it would pay. - taux hypothecaire
Let’s look at the options:
• Mr. A needs a $100,000 home loan (taux hypothecaire), 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
Mr. A, even though he paid a higher rate, has only paid $816.47 more than Mr. B., despite the fact that Mr. B paid a penalty of $825.35. The cost of the two loans is about equal after the 12 month period.
What does this tell us?
The open mortgage (taux hypothecaire) works if you want to avoid high early payment penalties, but it is only the solution to use if you are sure you will be paying off the mortgage within 12 months. If you are not, or if you are not certain, you should take out a fixed rate loan and perhaps have to pay the penalty if you pay the loan off early.
All of these kinds of decisions make it critical that you develop a mortgage strategy that will work for you. Everyone’s situation is different, so you can save a lot of money if you have a mortgage strategy that meets your unique needs.
Article Source: http://www.orbitaloc.com/
Gregory is an Accredited Mortgage Professional (AMP). To get more information on Mortgage Loans - pret hypothecaire, visit: Hypotheque - Mortgage Intelligence
Please Rate The Above Article From The Small Business Category
Article Title: Open Mortgage – A good idea? (taux hypothecaire)
Not yet Rated
Syndicate Small Business Related Articles Via RSS!
Subject to Orbitaloc.com's Publisher Terms of Service, you may reprint this
article on your own website, blog, and ezine. (English only) You may also syndicate
the article via Really Simple Syndication (RSS). It is free of charge.
Free Articles on Small Business and Other FREE Content Article Topics
The preceeding is an informative article from the Small Business category.
