An open-end mortgage allows you to borrow additional money on the same loan at a later date. An open-end mortgage blends some qualities of a traditional mortgage with some features of a home equity line of credit, or HELOC. It lets you turn the value of the equity in your home into cash by later increasing the original balance of your loan. If you need hands-on guidance figuring out how an open-end mortgage could play into your overall financial life, consider finding a financial advisor tailored to your particular needs.
It may be easiest to understand open-end mortgages in comparison with traditional mortgages and home equity lines of credit (HELOCs).
A traditional mortgage provides you with a single lump sum. Ordinarily, all of this money is used to purchase the home.
An open-end mortgage provides you with a lump sum that is used to purchase the home. But the open-end mortgage is for more than the purchase amount. The borrower can tap into this extra borrowing capacity later on as needed. In that way, it’s similar to a HELOC.
Unlike a HELOC, which is a second lien against your home, an open-end mortgage requires you to take out only one mortgage. Furthermore, HELOC lets you tap the line of credit any time you need it. An open-end mortgage may restrict the time during which you can withdraw funds.
Advantages of an Open-End Mortgage
Flexibility is the big plus of an open-end mortgage. It lets a borrower take cash out of home equity as needed.
It’s easier to take cash from equity using an open-end mortgage than by getting a home equity loan, HELOC or cash-out refinancing. With an open-end mortgage, you can request more funds without having to re-qualify or pay closing costs as you would with a second loan.
What’s more, with an open-end mortgage you only pay interest on the amount you have drawn. For instance, if you take out an open-end mortgage for $300,000 and use $200,000 to purchase the home, you only pay interest on $200,000.
If you later tap the mortgage for another $50,000, you would start paying principal and interest on the combined amount. That would be the $50,000 draw plus the initial loan balance of $200,000, less whatever you have already paid against principal in the interim.
Another advantage of an open-end mortgage is that there is generally no penalty for paying off the mortgage before the due date. Traditional mortgages often have a fee or early payment.
If you borrow more money using your open-end mortgage and then pay that amount back, you can borrow even more money. You can do this as long as the borrowing period is still open and the total amount you borrow doesn’t exceed the value of the property.
The 2017 tax law limited deductibility of mortgage interest to loans used to pay for purchasing, building or substantially improving a home. Be sure to talk to a tax professional before assuming you’ll be able to deduct interest on an open-end mortgage.
Cons of Open-End Mortgages
You’ll usually pay a higher interest rate on an open-end mortgage than on a traditional mortgage. Interest on the amount you initially borrow may be fixed or variable. But the interest rate on any new distributions you take is likely to vary with market conditions. So you may wind up borrowing at a higher interest rate later on.
Open-end mortgages may only allow you to take additional distributions during a limited time, the “draw period.” Once the draw period passes, the borrower can’t pull any more cash out of equity. A HELOC, by comparison, doesn’t have a draw period limitation.
Another disadvantage of an open-end mortgage compared to a non-mortgage loan is that, as with other mortgages such as home equity loans and HELOCs, your home is the collateral. That means you could lose your property if you don’t pay back the loan.
Finally, the total amount you borrow, including the initial amount and any later draws, normally can’t exceed the value of the home. This could become an issue if the value of your home later declines.
How to Get an Open-End Mortgage
Your lender is not likely to mention an open-end mortgage unless you ask about it. And if you do want an open-end mortgage, you have to be able to qualify for a higher loan amount than needed to purchase the property.
Otherwise, you apply for an open-end mortgage like any other mortgage. You’ll just need a credit history and income adequate enough to qualify for the larger loan amount.
People use open-end mortgages sometimes if they foresee a need to borrow against equity later on to pay for other major upcoming expenses. Because use use your home as collateral to secure them, they may be too risky to use to pay for vacations or other discretionary expenses.
But if you have the credit history and financial strength to acquire a home without needing to borrow the entire amount of the purchase price, and you foresee a need to borrow more down the road, an open-end mortgage can be a good alternative to home equity loans and other forms of financing.
Tips for Mortgage Management
- Anticipate mortgage payments. Understanding what you’ll be paying each month is key to planning how homeownership will look for you. Use SmartAsset’s free mortgage calculator to get a sense of what your monthly payment could be.
- Be open to advice. If you want to know how home buying fits into your overall financial plan, consider speaking to a professional advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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