A mortgage can be either open or closed. Open mortgages are loans that can be paid off at any time with no penalties. As a result of this privilege, open mortgages tend to have higher rates. Closed mortgages on the other hand have pre-payment restriction privileges. This means that if a borrower wants to pay off a closed mortgage ahead of its renewal date, they would face a pre-payment penalty. However, closed mortgages do have some flexibility as many often have certain pre-payment limits. These limits allow the holder of a closed mortgage to pre-pay a certain percentage of the mortgage amount on an annual basis without incurring a penalty.
A mortgage can also either have a fixed rate or a variable rate
. A fixed rate mortgage is a mortgage loan that has a set interest rate for the duration of the term. A variable rate mortgage is a mortgage loan that has a rate that can fluctuate with the lender's prime lending rate throughout the term. That means that the rate can decrease if the prime lending rate drops and increase if the prime lending rate rises. Variable interest rate mortgages tend to have lower interest rates compared to fixed rate mortgages to compensate the borrower for the risk of being exposed to changes in interest rates. One would benefit from a variable rate mortgage if the average mortgage throughout the term is below the fixed mortgage rate with the same term at the time of the mortgage origination. While variable rate mortgages generally only come in 3-year or 5-year terms fixed rate mortgages tend to be available in all terms.