What is a mortgage term?

The mortgage term refers to the amount of years a borrower has agreed to an interest rate with a lender. This is different from an amortization. During the term, the borrower is guaranteed the interest rate he or she agreed to with the lender (unless it is a variable interest rate).

The mortgage term is typically closed, rather than open. A close term means that the mortgage cannot be broken without a penalty. As such, it will have a lower interest rate because the lender is almost guaranteed a prepayment penalty if the borrower breaks the term. An open term will typically have a higher interest rate because the lender is not guaranteed any of the prepayment penalties that the closed mortgage term offers.

During this term, the borrower has prepayment privileges. This means that a lender may allow the borrower to pay up to, for instance, a maximum of 15% of the principle amount of the mortgage during each calendar year without any penalties.

If a borrower wants to break this mortgage and refinance with a new lender, borrower must pay a penalty, which is either three months interest or the interest different rate, whichever is higher. This is how borrowers are deterred from breaking their mortgage terms.