Mortgage 101
Open Mortgage
An open mortgage allows you the flexibility to pay off some or all of the mortgage at any time, without a penalty. Interest rates are usually much higher than Closed Mortgages to compensate the lender for interest lost in the event of an early pay out.
Note that most if not all lenders will charge a "Discharge Fee" of up to $300 in addition to any other fees or penalties they are charging. You would have agreed to this in the 'fine print.' Having said that this is a reasonable amount reflecting the administrative costs associated with the legal discharge of a mortgage.
Note also that sometimes lenders will charge a "Prepayment Fee" of up to several hundred dollars on the Discharge Statement. Usually on an Open Mortgage this is unwarranted and therefore they will waive this fee attributing it to an "administrative error." {How much money do they make from people who don't notice or are scared to ask?}
Closed Mortgage
A closed mortgage offers you the ability to commit to the lender that you will not pay off your mortgage balance, or any portion thereof, before the end of the term in return for a much more favorable interest rate structure for the entire term. Terms generally range from 6 months through to 10 years.
Note that many lenders will offer limited prepayment allowances including up to 20% of the original loan amount annually without a penalty. Any additional prepayments, including a full pay out, before the end of the term will be subject to a penalty of three months interest or the lost interest revenue to the end of the term, whichever is greater.
Fixed Rate Mortgage
A fixed rate mortgage offers you the security of locking in your interest rate for the term of your mortgage so you know exactly how much principal and interest you will be paying on the mortgage during the term. Fluctuations in market interest rates do not impact you because you are locked in at the rate you agreed to.
Variable Rate Mortgage
A variable rate mortgage allows you to take advantage of today's low Prime Rates. The interest rate fluctuates in relation to the 'Prime Rate'. Lenders compete by offering various discounts below the prime rate. Payments may be fixed for up to 5 years although the rate of interest will always fluctuate according to Bank Prime. If the Prime rate climbs you pay more interest and if the prime rate descends you pay off more of the principal.
Term and Amortization
These two terms frequently confuse people, because while they represent two totally different concepts they are often both used to answer the question "how long is your mortgage?" TERM refers to the length of time of your current agreement/rate structure whereas AMORTIZATION refers to the length of time required to pay off your mortgage completely.
Typically Terms run 6 months through 5 years, although some lenders will offer up 10 years or longer. This means that whatever rate structure {interest rate, fixed/variable, open/closed, etc...} and options {prepayment privileges, payment frequency, portability, conversion, rate caps, etc...} you agree to are set for the specified Term. At the end of the Term, or Maturity, you are free to re-negotiate these details and/or change the lender you use.
Amortizations are typically 25, 30, or 35 Years initially and start counting down with every mortgage payment made. The Amortization will be further cut down by making extra payments and principal pay-downs. When you refinance it's common to extend the Amortization back out to it's original length in order to reduce the payment amount.
Note that it is entirely possible that your Amortization may never change away from its original schedule however you will have multiple Terms within that Amortization.
