Open-End Mortgage
Last Updated :
21 Aug, 2024
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Dheeraj Vaidya
Table Of Contents
What Is An Open-End Mortgage?
Open-End Mortgage refers to a special type of home loan where the entire loan amount is not disbursed together; instead, one can draw the amount as and when required. It allows the mortgage loan borrower to borrow amount left after buying a home for renovation or improvement at a later date.
The loan amount approved initially remains the same but gets split into two within the limit. The mortgage procedure and system followed depends on the state in which one lives. A good credit score matters when granting a loan. It can be understood as a hybrid between home equity line of credit (HELOC) and traditional loans. It gets used chiefly in open-end mortgage real estate.
Table of Contents
- An open-ended mortgage is just like a traditional mortgage but provides the borrower with a facility to take extra cash during the loan term for surplus expenses.
- It helps the borrower to manage the improvement, addition, and maintenance of the mortgaged property after shifting into it.
- An open-ended mortgage has a higher interest rate, while a closed-ended one has a lower interest rate. Moreover, open-ended loans have high prepayment charges, whereas closed-ended loans have lower or zero charges.
- It has certain benefits, like no extra charges for foreclosure, processing, appraisal, or documentation. However, it has the disadvantage that the home serves as collateral and has a draw period to avail of the second time loan.
Open-End Mortgage Loan Explained
An open-ended mortgage can be explained as an expandable home improvement loan, allowing an individual borrower to use home equity escalation for extra funds at a later date. Open mortgages have been a flexible form of a mortgage. One can enhance their regular payments and make extra lump-sum payments when required. However, these payments do not attract any penalty from the lender. Therefore, it has been categorized as a less prevalent mortgage loan.
Here, the lender sanctions the maximum permissible loan amount for the mortgage. However, the debtor has the freedom to avail of it in two parts—one at the time of buying the home and the second time for improving the home. After availing of the first part of the loan for the first time, the borrower can avail of the remaining amount the second time without any charges. It has some advantages of HELOC and some characteristics of a traditional mortgage.
Moreover, such loans help borrowers save a lot of time and difficulty searching for additional loans from other lenders. It acts as a revolving credit where the borrower can easily tap into the same loan within the pre-sanctioned loan limit. Banks usually grant the facility based on the maximum loan-to-value ratio.
It has certain advantages like:
- Flexibility to take the second chunk of loan any time one wants.
- Easily access to take cash from the same mortgage a second time.
- One can easily prepay the loan without any charges.
- No extra costs are involved in its closure appraisal or documentation.
- Once the borrowed amount has been paid in full, the borrower can avail of a loan of a greater amount.
The draw period for a second-time loan, collateral of the home, and property depreciation, however, can increase the cost of the loan.
Examples
Let us look at some examples to understand the topic properly.
Example #1
Let us assume that Alex has taken an open-ended mortgage for $500,000. Out of it, Alex uses $300,000 to purchase a home. Hence, Alex has to pay the interest only on $300,000 and not the full loan amount sanctioned, i.e., $500,000. Later, Alex needs $50,000 for furnishings, for which Alex taps into the unused amount of $200,000 using an open-end mortgage deed.
Therefore, Alex will now pay the total loan amount and interest of $350,000. Thus, Alex could take the loan amount two times without any trouble and delay and at no second lien over the mortgaged property.
Example #2
Our second example would be Noah, who decides to take up a loan of $200,000. The lender secures that loan with a mortgage. But Noah draws a sum of $20,000 in principle during the closing. Now, the lender has the facility to offer the rest amount of $80,000 to Noah as a loan without again going for the second mortgage. In other words, Noah would be able to get $80,000 more in loan from the same mortgage only.
Open-End Mortgage vs Closed-End Mortgage
Let us understand the key differences between open-end mortgage and closed-end mortgage using the table below:
Open-End Mortgage | Closed-End Mortgage |
---|---|
It has lower rates of interest. | Refinancing loans is quite easy. |
It comes with either a one-time or prepayment mode. | It has higher rates of interest. |
One always gets limited while opting for prepayments. | One always gets unlimited transactions while opting for prepayments. |
Huge penalties get levied if one wants to prepay or foreclose the mortgage loan. | If one wants to prepay or foreclose the mortgage loan, zero penalties get levied. |
One can face costly refinancing here. | Refinancing loans gets quite easy. |
Frequently Asked Questions (FAQs)
An open-ended mortgage allows borrowers to apply for the maximum permissible loan limit as per their eligibility, even when they do not need the full amount for a home loan. However, the borrower can use the unused amount at any stage after buying the home.
No, both have differences; HELOC( Home equity line of credit) means the second lien upon one's house, but an open-ended mortgage allows only one lien on the mortgage. In addition, one could avail of HELOC credit anytime, but an open-ended mortgage has certain time limitations for availing an unused portion of the loan.
The closed-ended mortgage is considered a low-risk loan; hence, lenders charge a lower rate of interest. On the other hand, open-ended mortgages have a little higher interest rate, but they can be prepaid without any charges.
One should choose a close-ended mortgage only if one needs one single purchase. An open-ended loan is chosen when the borrower needs a revolving line of credit for miscellaneous ongoing expenditures.
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