What is an Open End Mortgage?

You have probably heard about home loans, also commonly known as mortgages. They help you buy a home for yourself after which you can pay back the loan. There are many types of mortgages. But the one we are curious about is an open end mortgage.

What is an Open End Mortgage?

With an open end mortgage, you can borrow additional money at a later date on a loan you already had. It is a mix of some qualities of a traditional mortgage and some features of a home equity line of credit, also known as HELOC.

You can turn the value of your home equity into cash by increasing the loan balance you originally had. You are permitted to go back to the lender and borrow more money, although, there might be a set dollar limit on how much you can borrow.

Unlocking Flexibility: Understanding Open End Mortgages

An open end mortgage combines aspects of a delayed draw term loan with the flexibility of revolving credit, tailored for real estate investments. Borrowers secure these loans against property, accessing funds as needed without committing to the full amount upfront.

Applying for an open end mortgage mirrors other credit processes, leveraging credit scores for terms. Co-borrowers can enhance approval chances by reducing default risks.

Unlike traditional loans, it offer a maximum principal over time. Borrowers selectively draw from approved amounts to cover home expenses, minimizing interest on the outstanding balance.

The draw period, when funds are accessible, is specified in the mortgage terms, often linked to property value. This contrasts with revolving credit, which remains open-ended unless defaulted.

Example Scenario: Imagine a borrower secures a $200,000 open end mortgage for a home purchase at 5.75% over 30 years. They opt initially for $100,000, paying interest solely on what’s withdrawn.

Six years later, they draw an additional $50,000, adding it to the principal and adjusting interest payments accordingly.

Open end mortgages prioritize secured collateral for withdrawals, ensuring funds are reinvested into the property, aligned with lender terms.

Understanding these dynamics unlocks financial flexibility, blending structured borrowing with tailored real estate investment strategies.

Advantages of an Open End Mortgage

One of the biggest plus points is the flexibility. The borrower can choose to take out as much cash out of home equity as much is needed.

Furthermore, it is easier to take out cash from equity through an open end mortgage than it is by getting a home equity loan, HELOC or opt for cash-out refinancing. Whereas with this, you can have the freedom of requesting more funds without having to re-qualify or even pay closing costs that you would have to pay with a second loan.

Moreover, with an open end mortgage, the interest is only paid on the amount you have drawn. For instance, taking out amount of $200,000 where you use only $100,000, you would only have to pay interest on the $100,000.

If you later decide to borrow an additional $100,000, you would have to start paying principal and interest on the combined amount. So you would be paying for the additional $100,000 as well as the initial loan balance of $100,000 minus the amount you have already paid in the interim.

Another advantage of an open end mortgage is that there is no penalty for paying off the mortgage before the due date comes whereas traditional mortgages tend to have a fee for early payment.

Once you borrow money using the mortgage deed and pay it back on time, you can borrow even more money if you want. This can continue for as long as the borrowing period stays open. However, you should note that the total amount you borrow should not exceed the property value.

Disadvantages

An open end mortgage a future advance clause will typically have a higher interest rate than a traditional mortgage would have. The interest rate on the amount you initially borrow may be fixed. However, if you borrow any additional amount, the interest rate may vary with market conditions. So it is possible that you end up borrowing at a higher interest rate than you borrowed on before.

Open end mortgages only have an allowed period where you can borrow the money you want that is known as the “draw period.” So once the draw period ends, the borrower will not be able to take out any more cash out of equity. Whereas a HELOC does not have any set limitations about when the additional money can be borrowed.

Another drawback of an open end mortgage is that your home is the only collateral. You can end up losing it if you do not pay back the loan on time. Which means you would not have a place to live anymore.

Lastly, the total amount that is borrowed, including the initial amount and any additional draws, will not normally exceed the value of the home. However, this can end up becoming an issue for you if your home declines.

Open End Mortgage vs. Closed End Mortgage

We know what an open end mortgage is. But how different is it from a closed end mortgage?

A closed end mortgage has strict rules and restrictions for its borrowers. However, it can have either a fixed or variable rate. It cannot be prepaid, renegotiated or refinanced without paying the breakage costs to the lender.

Whereas an open end mortgage can be repaid early but will have a higher interest rate.

There is also the option of a convertible mortgage that blends the features of an open end and closed end mortgage together to create an infusion to make a product that will cater to people who cannot find a balance between open end and closed end mortgages.

Bottom Line

An open-end mortgage offers flexibility for tapping into home equity as needed for future expenses. It’s ideal for those who anticipate periodic financial needs without borrowing the entire purchase amount upfront. However, using your home as collateral for non-essential expenses like vacations can be risky.

Having a strong credit history and financial stability increases your chances of securing a home without needing a full loan amount upfront. Open-end mortgages serve as a viable alternative to traditional home equity loans, providing flexibility for future financial needs.