What is an Open-End Mortgage?

An open-end mortgage is a mortgage product which allows the borrower to take out additional sums on the main mortgage as long as certain conditions are met. These loans are commonly used for improvements although this is not required. Candidates for open-end mortgages can explore this financing option at the time that they apply for mortgage loans. The standards for people who will be offered such loans vary from lender to lender.

With a traditional mortgage, the borrower takes out a set amount, the principal, and establishes a repayment plan to pay the principal back along with the interest. In an open-end mortgage, the borrower can increase the amount of principal by taking out additional funds from the lender. The setup is similar to that of a home equity line of credit (HELOC) but the additional funds come directly from the creditor and the loan is structured slightly differently.

Generally, the borrower must maintain a ratio throughout the life of the loan in terms of principal left on the loan to value of the home. For example, a lender may say that a borrower can borrow no more than 80% of the value of a house. In order to take out more money, the borrower must pay down the loan so that this ratio will not be exceeded. Every time a borrower chooses to re-borrow, it also extends the life of the loan.

When considering this type of loan product, people should think carefully about how it will be used. A borrower who plans to continually take out the maximum allowable amount of money can run into trouble as the life of the loan will keep extending and the borrower will pay a great deal of interest over the life of the loan. On the other hand, someone who wants flexible financing and the option to tap into a readily available source of funds in case of emergency may find such a loan very useful. For instance, someone could take out an open-end mortgage and then use a loan to replace the roof or foundation of the home.

To apply for an open-end mortgage, people usually need to have a strong credit history with evidence that they can comfortably repay the loan in the event that it reaches the maximum allowable amount. There may be other factors which also come into play, depending on the policies of the individual lender. People who are interested in an open-end mortgage should get quotes from several lenders before making a decision about which one to use.