Open-end Mortgage (Deed Of Trust)
Definition of "Open-end mortgage (Deed of Trust)"
The definition of an open-end mortgage underlines the fact that the mortgage or trust deed can be increased by the mortgagee (borrower). The mortgagee may secure additional money from the mortgagor (lender) through an agreement, which typically stipulates a maximum amount that can be borrowed. That might be a bit too complicated, so we’ll try to dissect the open-end mortgage in more understandable terms.
What is an open-end mortgage?
The open-end mortgage is a type of mortgage that is more flexible for the mortgagee and more giving, unlike a closed-end mortgage. Yes, giving! A mortgagee, through an open-end mortgage, can obtain a specific amount of money that is called a principal amount. The first time the mortgagee takes out money, they take out 50% as they are not required to utilize it all. For that 50% (which is called an outstanding amount) they will have to pay interest, but as the other 50% is unused, the interest will not be required for it. With that money, the mortgagee buys the house. After a while, with plans to renovate the house, they take out 25% more. Now, they will pay interest for 75% of the mortgage, which is called a total outstanding balance.
For example; when a borrower takes out a mortgage, uses a part of it for the purchase of the home and leaves the rest there for future use. The borrower only pays interest rates for the amount of money used. This is how an open-end mortgage is compared to an open-end loan. The difference between the two is that for an open-end mortgage, the funds are available for a specific amount of time, while open-end loans are revolving credits that can be reused until the borrower decides to close the line of credit.
The mortgage is used to purchase property, but through an open-end mortgage, the borrower can use it on renovations for that property. This is a drawback of the open-end mortgage. It can only be used for the collateral that is pledged for the mortgage.
Example of an Open-End Mortgage
Jonathan wants to buy a house for him and his family. He manages to obtain a $200,000 principal amount from an open-end mortgage that he intends to use to purchase a home. The mortgage has a fixed term of 30 years and a fixed interest rate of 6.25%, which suits him because he intends to stay there until his kids are all grown-up. To buy the home, he needs $100,000, so Jonathan takes out half of the principal amount. On this $100,000 outstanding amount, Jonathan begins to pay interest rates at 6.25%. Seven years pass, and Jonathan keeps paying his interest rates, but he wants to renovate the kitchen, so he goes back to the lender and takes out an additional $50,000 from the mortgage that will be added to the outstanding amount which would total at $150,000. On the total outstanding balance, Jonathan will make interest payments at the same interest rate of 6.25%.
Popular Real Estate Terms
Assemblage in real estate is the process of combining multiple small plots of land into one larger plot. This is accompanied by plottage, which is the increase in value that occurs when ...
An upper limit on the interest rate that can be charged in a variable rate mortgage over its life. For example, a variable rate loan is initially offered at 7% loan rate, and its interest ...
Looking for an amortization definition? Amortization is an accounting term that basically means something like “reducing the gap between what is owed”. Here’s the play by ...
An individual, educated, trained, and licensed in the principles of designing structures, and rendering drawings, specifications, bidding requirements. ...
Those factors causing the movement of people, industry, and business from the central city to the outside central city areas, suburbs, and/or small cities. Elements of the dispersing force ...
Another residence in addition to the main residence where a person or family resides. An example is a second home out of the city used on weekends and during vacations. Interest and real ...
Lien which is over and above a first lien. A second lien is subordinate to the first lien and can be satisfied only after the initial lien is satisfied. ...
Projecting structure or part of a building. For example, a home was built with balconies jutting out from the sides of the building or a large rock formation constructed out into the ocean ...
An obligation of the owner of property that is recorded with his permission such as a mortgage. Encumbrance on property without being objected to by the owner. ...
Have a question or comment?
We're here to help.