What Is An Open-End Mortgage And Should You Consider Getting One?

Anyone who’s purchased a home knows that it comes with expenses beyond the listing pricez. When you buy a house, you’ll likely have to plan for a down payment, closing costs and moving expenses.

Once you move into the house, you may end up paying even more money for home improvements. Many homeowners will put these expenses on a high-interest credit card, but other options are available. If you’re wondering how to pay for renovations when buying a home, you could consider taking out an open-end mortgage.

While Rocket Mortgage® doesn’t offer open-end mortgages, it’s important for anyone researching these types of loans to understand what they are and how they function. Let’s take a look at what open-end mortgages are, how they work and the pros and cons of getting one.

What Is An Open-End Loan?

An open-end mortgage is a type of mortgage that lets borrowers take out the maximum loan amount they qualify for to buy a house and pay for home improvements. The portion of the loan that isn’t used to buy the house, also called “future advances,” is available to the borrower after the real estate transaction is complete.

The unused portion of the mortgage can only be used to fund home improvements. Borrowers are not charged interest on the unused money until they access it.

An open-end mortgage is also sometimes called a home improvement loan. It’s like a mortgage and a home equity line of credit (HELOC) rolled into one loan when a property is purchased. However, open-end mortgages are less common than other types of home loans.

How Does An Open-End Mortgage Work?

An open-end mortgage often works best when home buyers or investors buy a fixer-upper that requires serious home renovations.

For instance, maybe you’re approved to take out a principal amount of $400,000.The home you end up purchasing costs $300,000, but it needs some work done. With an open-end mortgage, you’ll still be approved to take out the entire $400,000 loan. However, you’ll only pay interest on the money you use to purchase the home and to cover your renovation costs.

After you buy the house, let’s say you put $50,000 worth of work into it. Since you only spent $350,000, that’s the total loan amount you’ll make principal and interest payments on.

You can use a mortgage calculator to see how your mortgage payment will be affected by tapping into the unused loan proceeds. Keep in mind that open-end mortgages aren’t available in every state.