An open-end mortgage is a type of home loan where the lender does not provide the entire loan amount at once. Instead, borrowers use loan funds from time to time as required. As a borrower, you can increase the mortgage principal’s outstanding amount at a later date. This home loan type allows you to go back to the lender to borrow additional money.
Unlike the traditional mortgage, an open-end mortgage allows the prospective homebuyer to buy a home without the full amount they’re eligible for. Borrowers then continue drawing funds from the loans once they move into the home. Understanding the open-end mortgage loan is essential for real estate professionals and homebuyers searching for financing options. This article will teach you about how an open-end mortgage loan works and whether it’s your best option.
What is an open-end mortgage?
Open-end mortgages are home loans that allow the borrower to use the money from the loan as required, even after purchasing the home. An open-end mortgage gives you enough funds to purchase a home just like a traditional mortgage. However, it also permits you to increase the loan amount at a later date, drawing from it like you would with a home equity line of credit (HELOC).
Other alternate names for an open-end mortgage include “open-end loans” and “mortgages for future advances.”
Let’s suppose a borrower wants to purchase a house for $250,000 but qualifies for an open-end mortgage worth $350,000. He will only make interest and principal payments on the $250,000 he first received until he takes additional funds.
Then, if he takes a draw of $30,000, he’ll start making payments on the amount combined with the current principal balance. The same goes for any extra draws he takes in the future.
How an open-end mortgage works
An open-end mortgage is similar to a combination of a HELOC and a traditional mortgage. The only difference is that you’ll apply once instead of adding a second lien to the home through a separate HELOC.
You’ll begin with the maximum loan amount you can borrow over time. Part of the amount goes towards the purchase price, and the remainder is left for you to withdraw later. However, the borrower must use the remaining funds for changes or improvements to the home. Like with a HELOC, you can borrow from the extra available credit, pay it off, and draw again.
It’s important to note that lenders limit the loan amount to what you were initially approved for when first taking out the loan. This depends on the amount of the initial mortgage and the home’s value. Although you access the loan at two different times—making improvements and buying the home—you’ll only have one loan and one monthly payment to make. The monthly payment may increase to cover the new balance or the loan term could extend.
Once the loan is repaid in full, check to see if you need to submit a request to terminate or cancel the loan. Remember that the structure and requirements of open-end mortgages vary depending on your location. State laws determine how mortgage lenders provide open-end mortgages and define the priority of property liens if there are multiple liens.
As with other mortgage products, your credit profile and credit score will determine the loan terms. Before you apply, review your credit report to ensure there are no errors or inaccuracies hurting your credit score. The borrower’s credit score requirement depends on the lender, but typically the minimum FICO score required for a conventional mortgage is around 620.
Pros and cons of an open-end mortgage
Here is a list of the benefits and the drawbacks to consider.
- Flexibility with financing needs
- Borrowers may withdraw more money for home improvements, renovations, and other discretionary home-related expenses
- Interest accrues only on what’s borrowed
- Avoid the expenses of a higher interest rate and refinancing that often comes with second mortgages
- Limited draw period depending on the initial funding and loan terms
- Set borrowing limits
- Not all lenders offer them
Open mortgages restrict withdrawals to the initial loan amount, so you could apply for a second loan if you need more money than you first qualified for. However, you may end up paying more interest payments by spreading out the loan payments over a long period.
If you’re looking for this specific loan type, we recommend reaching out to a mortgage expert for further assistance.
Is an open-end mortgage worth it?
It’s best to weigh all of your mortgage options before deciding which one is best for you. Open mortgages are especially helpful if you’re eligible for a larger loan than the target loan amount for the property.
However, an open-end mortgage limits how to use funds. Also, these mortgages often cost more than traditional mortgage loans. Therefore, it might not make sense if you don’t plan to invest in your property.
On the other hand, it may be best to go for a traditional mortgage and apply for a HELOC or home equity loan when you need it. This is especially helpful if you believe you’ll use your home equity loan in the future without specific plans.
Getting an open-end mortgage
If you’re looking to apply for an open-end loan, you should be ready to prove several qualifying factors, such as your assets, income, credit score, and employment. The prospective lender will also check the outstanding balance on the current mortgage.
Alternatives to an open-end mortgage
Open-end mortgages provide similar benefits to a traditional mortgage loan combined with a HELOC or home equity loan. If you follow this procedure, you’ll go through two application processes and two closing costs. However, you can still decide how much you need and when, or even having it all.
Lenders provide the home equity loan as a single lump-sum disbursement, which may or may not work best for you.
- An open-end mortgage is a type of home loan where lenders don’t provide the entire loan at once. Instead, use the funds as necessary and borrow more if needed.
- Though you can borrow more from an open-end mortgage, this mortgage limits how funds are used. You can only borrow more to fund renovations or home-related costs.
- An open-end mortgage works like a combination of a HELOC and a traditional mortgage. However, instead of adding a second lien to your home, you’ll only apply once.
- Open-end mortgages are not for everyone. Despite their flexibility, open-end mortgages limit your funds to what you initially borrowed.
View Article Sources
- Best Mortgage Lenders for First-Time Homebuyers | January 2022 — SuperMoney
- How to Finance a House — SuperMoney
- Best Mortgage Lenders | January 2022 — SuperMoney
- 2021 Mortgage Industry Study — SuperMoney
- Closed, open, and convertible mortgages — RBC Royal Bank