Closed Period

What is a Closed Period?

A Closed Period is a stipulated duration within a mortgage agreement during which the borrower is restricted from prepaying the loan. This provision is typically found in commercial property mortgages, though it is infrequent in residential mortgages. The underlying property can still be sold, and the mortgage can be assumed by the new buyer, but the initial borrower cannot choose to pay off the mortgage early.

Examples of Closed Period

Commercial Office Building: A company acquires a $10 million mortgage for an office building at a 6% interest rate with a 10-year closed period. After the origination of the mortgage, the market interest rates drop to 4%. The borrower wants to refinance to take advantage of the lower rates but is restricted from doing so during the closed period.
Shopping Mall: An investor buys a shopping mall with a $25 million mortgage that includes a closed period. The mortgage has an 8-year duration during which prepayment is not allowed. If the investor finds a lucrative refinance option in the fifth year, they are still bound by the original agreement and cannot settle the mortgage before the closed period ends.

Frequently Asked Questions (FAQs)

Q1: Why do lenders include a Closed Period in mortgage agreements?

A1: Lenders include a Closed Period to secure a stable return on their investment and mitigate the risk associated with prepayments. It ensures that the lender receives the expected interest income over the agreed-upon period.

Q2: What happens if I prepay a mortgage during the Closed Period?

A2: Prepaying a mortgage during the Closed Period generally results in penalties or is outright prohibited. It is vital to refer to the mortgage agreement for specific terms and consequences.

Q3: Can a Closed Period be negotiated?

A3: Negotiating the terms of a Closed Period is typically challenging, especially in commercial mortgages. However, borrowers might be able to discuss adjustments with the lender during the initial negotiation stage before finalizing the mortgage agreement.

Q4: Is the property locked during the Closed Period?

A4: The property itself is not locked. The borrower can still sell the property, and the buyer may assume the mortgage under similar terms, but prepayment restrictions remain in effect on the original borrower’s agreement.

Prepayment Penalty: A fee charged by the lender if the borrower pays off part or the entire mortgage before the due date. It compensates the lender for the loss of anticipated interest income.
Assumable Mortgage: A type of mortgage that the buyer can take over from the seller under the existing terms. Typically seen in properties with a Closed Period.
Interest Rate Lock: An agreement established at the time of mortgage origination that locks in a specific interest rate, protecting the borrower from fluctuations in rates during the period up to closing.
Loan Covenant: Conditions outlined in a loan agreement that the borrower must adhere to, including stipulations like a closed period or limitations on allowable prepayments.

Online Resources

Consumer Financial Protection Bureau - Provides information and regulations around mortgages and prepayment penalties.
Federal Trade Commission - Offers insights into mortgage agreements and consumer rights.
National Association of Realtors (NAR) - Contains resources and educational materials related to real estate financing.

References

Geltner, David, Norman G. Miller, Jim Clayton, and Piet Eichholtz. “Commercial Real Estate Analysis and Investments.” OnCourse Learning, 2021.
Brueggeman, William B., and Jeffrey D. Fisher. “Real Estate Finance and Investments.” McGraw-Hill Education, 2015.
Miles, Mike E., Gayle Berens, and Marc Weiss. “Real Estate Development: Principles and Process.” Urban Land Institute, 2015.

Suggested Books for Further Studies

“Investing in Commercial Real Estate” by Joseph G. Louvaris
“The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate Investing” by Than Merrill
“Commercial Real Estate Restructuring & Distressed Assets Workbook” by Joshua Kahr

Real Estate Basics: Closed Period Fundamentals Quiz

### What is a Closed Period? - [ ] A time when property transactions cannot be processed. - [ ] A brief period for mortgage adjustments. - [x] A specified duration when prepayment of the mortgage is prohibited. - [ ] A moratorium on collecting rent. > **Explanation:** A Closed Period is a specified duration during which prepayment of the mortgage is prohibited, securing the lender’s predictable return. ### Why do lenders favor including a Closed Period in loans? - [ ] To complicate the borrower's finances. - [ ] To ensure the borrower stays with the same property. - [x] To secure a guaranteed interest income over a period. - [ ] To prevent borrowers from refinancing. > **Explanation:** Lenders include a Closed Period to ensure they receive a guaranteed return from the interest income over the agreed period, safeguarding their investment. ### Can the borrower sell the property during a Closed Period? - [x] Yes, but the new owner may assume the mortgage. - [ ] No, the property should not be sold. - [ ] Only under certain economic conditions. - [ ] Yes, and the mortgage will be automatically prepaid. > **Explanation:** Borrowers can sell the property during a Closed Period, and the new owner may assume the mortgage, adhering to the existing closed period restrictions. ### Which type of mortgage often includes a Closed Period? - [ ] Residential mortgages - [ ] Agricultural mortgages - [x] Commercial mortgages - [ ] Construction loans > **Explanation:** Closed periods are more commonly included in commercial property mortgages than in residential mortgages, providing lenders with more predictable returns on investment. ### What typically happens when interest rates drop during a Closed Period? - [ ] The lender adjusts the rate to match the market. - [ ] The borrower can refinance without restrictions. - [x] The borrower cannot refinance without incurring penalties. - [ ] The loan amount changes to benefit the borrower. > **Explanation:** If interest rates drop, the borrower cannot refinance without facing penalties or restrictions imposed during the closed period. ### What is a key condition for a mortgage to have a Closed Period? - [ ] It must be an adjustable-rate mortgage. - [x] It must be specified in the loan agreement. - [ ] It must be a loan from a non-bank institution. - [ ] The property must be residential. > **Explanation:** A key condition for a mortgage to have a Closed Period is that it must be specified in the loan agreement. It is a contractual term and needs clear stipulation. ### What can a borrower not do during a Closed Period? - [ ] Move out of the property. - [ ] Invest in other ventures. - [x] Prepay the remainder of the mortgage. - [ ] Apply for more loans. > **Explanation:** During a Closed Period, a borrower cannot prepay the remainder of the mortgage. This restriction is to ensure the lender receives the anticipated interest income. ### When is a Closed Period negotiation typically allowed? - [ ] After the first year's loan anniversary. - [ ] Midway through the loan term. - [ ] During any payment cycle. - [x] Before finalizing the mortgage agreement. > **Explanation:** Negotiation of a Closed Period is typically allowed before finalizing the mortgage agreement. Once agreed upon, the terms are generally non-negotiable. ### What happens if a borrower violates the Closed Period conditions? - [x] They incur penalties or fees. - [ ] The loan automatically converts to another type. - [ ] The principal balance increases. - [ ] There are no consequences. > **Explanation:** Violating the Closed Period conditions usually results in penalties or fees imposed by the lender to compensate for the loss of anticipated interest income. ### What is the primary purpose of a Closed Period in mortgage agreements? - [ ] To benefit the borrower’s financial decisions. - [x] To safeguard the lender's interest returns. - [ ] To provide predictability to property transactions. - [ ] To enforce property use restrictions. > **Explanation:** The primary purpose of a Closed Period is to safeguard the lender's interest returns by preventing early payoffs that could disrupt expected income flows.