In U.S., closed-end mortgages are far more prevalent to open-end mortgages. But it’s not a matter of choice. Most of the people don’t even know that such a thing exists. You may probably have never heard of it, neither were you told by your lender. Why? Well, may be because the lender or banker doesn’t want their borrowers to go for it as it enables the latter to pay off their debts quicker.
Simply put, Open-End mortgages are wherein the borrower can request his lender to increase the amount of mortgage during the loan tenure. The additional amount that can be borrowed is set at a certain limit. The limit is set in such a way that the loan principal that is yet to be paid does not exceed the appraised value of the home. It is also referred to as home equity line of credit. And did we tell you? The interest on a home equity line of credit is tax deductible.
Open-End Mortgages vs Close-End Mortgages
An easier way to understand open-end mortgages is to see it in contrast with close-end mortgages.
|Open-End Mortgages||Close-End Mortgages|
|It can be paid off in full even before the end of the loan term and incurs no penalty||It is usually paid off in lump-sum payments and if paid off in full before the end of the loan term, it incurs a penalty|
|It comes at a comparatively higher rate||It comes at a comparatively lower rate|
|Allows you to make payments and take out money||Allows you to make payments but not to take out money|
|Acts as a line of credit||Acts as a lump-sum loan amount|
How it Works?
It’s a financial tool that the borrower can use to draw additional funds on their mortgage. The funds so drawn are secured by the principal amount paid so far. In a way, open mortgage works more or less the same way as a credit card wherein the borrower can borrow up to a set limit, pay off the debt and borrow up to that limit again.
Moreover, open-end mortgage lets a borrower to access his home equity. In case of close-end mortgages, if a borrower wants to access his equity, he has to either sell the property or switch to refinancing.
What’s Not So Good?
Now on to the glitches of open-end mortgages – Some of these mortgages are so structured, that the borrower can access his equity only during a fixed period called as draw period. Once the draw period ends, the borrower has to start repaying the loan and can no more access his equity. Might we add, the borrower also needs to incur additional fees for non-usage of an open-end mortgage account!
Nevertheless, open-end mortgages work well for those who need continuous line of credit for ongoing expenses. Now when you know how useful open-end mortgages to your financial health are, you should ask your banker or lender for offering you one!