Whether you are looking for some extra cash to start or finish a project, need to pay a major expense, or simply want a line of credit open for any reason, an open-end mortgage may be the right choice for you. In many cases, it may even be preferable to taking out a credit card or other traditional lines of credit.
Essentially, an open-end mortgage is a way of taking out extra money on an already existing mortgage loan. With an open-end mortgage, you are able to take out a loan worth more than the value of the house, leaving extra credit ready to be tapped into at your discretion. Here is how it works:
What is it good for?
An open-end mortgage is essentially a line of credit. With that in mind, an open-end mortgage is best suited for those who anticipate the need to take out a large sum of money in the future and wish to do so by converting the equity of their house into available cash. This means that the money taken out can be used for almost any expense, from home renovation or repair to outstanding bills. However, since your property is being used as collateral on the loan–and can be lost if you default–it is generally ill-advised to take on an open-end mortgage for unnecessary or risky ventures.
How does it work?
Remember that when you take out an open-end mortgage, you are taking out a loan worth more money than the actual value of your home. Whatever portion of the loan you do not immediately use to purchase the home is the extra value that makes the loan open-end. For example, if you buy a house worth $150,000 and take out an open-end loan worth $180,000, you now have $30,000 to use at your discretion. You can take it all out at once, or use it more judiciously.
One of the nice things about this type of loan is that you only have to pay interest on what you have taken out. So to reference the example above, if you only take out $10,000 of the $30,000 extra available to you, you are only required to pay interest on that $10,000, not the remaining $20,000 that you never put to use.
Another important thing to know about open-end loans is that you must take out the money within a limited timeframe. After this period, known as the draw period, it is impossible to take out any more money without completely refinancing your loan. However, the draw period is usually long enough to suit your withdrawal needs, and has no effect on the amount of time required to actually pay off the loan.
How can I get approved?
If you have never heard of an open-end mortgage before, or your lender has not brought it up, you are not alone. Because they are somewhat unconventional, the option of taking out an open-end mortgage is unlikely to come up unless you explicitly ask for it.
As far as the practical considerations of getting approved are concerned, it is, in nearly every way, identical to a traditional mortgage. The only major difference is that in order to take out a loan worth more than the value of your home, you will naturally need to have the financial means and credit history that correspond to a loan of that size.
What are the pros and cons?
There are a number of advantages to an open-end mortgage. Not only are you able to take out an extra line of credit, but the interest rate is usually favorable compared to, for example, a credit card. In fact, mortgage interest rates tend to be 10 to 15 percent cheaper than average credit card interest rates. Furthermore, so long as the draw period has not ended, the remainder of the loan, in its entirety, is available for you to withdraw and use as you wish, without having to reapply or re-qualify, as would be the case if you were simply taking out a second loan. Finally, in the case of an open-end mortgage, there is typically no penalty for paying off the entire loan early, which is often the case with a traditional mortgage.
One of the biggest disadvantages of an open-end mortgage is that your loan is tied directly to the value of your home; as a result, you could face some serious problems if the value of your home decreases. What’s more, since your home serves as collateral, you could even lose it if you find yourself unable to pay off what you owe. The last big disadvantage is that the interest rate of an open-end mortgage tends to exceed that of a regular mortgage, although current trends in the market will always have some part to play in this calculation as well.
So open-end mortgages are not for everyone. However, if you are looking for a smart way to get your hands on a sizable chunk of credit at a relatively low interest rate, an open-end mortgage might be just the thing for you. If you are curious, talk to an expert today!
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