What is an Open-End Mortgage Loan & How Do They Work?

Mother and son laughing in kitchen while making a smoothie

*This article is for educational purposes only. American Financing does not offer open-end mortgages. Though we do have an All-in-One product. The All-in-One product may not currently be available as a result of COVID-19 lending restrictions.*

Winter is usually the time of year when consumers reach for their credit cards the most. Holiday shopping, home improvement projects, car repairs — these are major expenses for the average consumer. Yet most won’t think twice about putting it all on a high-interest credit card.

Maybe you’re thinking, “The rewards points make it worth paying with a credit card.” Well, according to creditcards.com, the average credit card interest rate is 17.21%. Unless you plan on paying off the entire balance at once, you could be hit with hundreds or even thousands of dollars in interest a year. There isn’t a rewards program out there that takes away the sting of credit card debt.

An open-end mortgage loan could be an effective alternative to a credit card. Keep reading as we define this loan, discuss how it works, and help you determine if it’s the right loan for your needs.

What is an open end mortgage?

Let’s say you’ve lived in your current home for several years. An open-end mortgage allows you to access your home equity and use the funds as necessary. If approved, you will be able to borrow additional funds on the same loan amount up to a limit established by the lender. Keep in mind, your borrowing limit depends on your home's value and the amount of your first mortgage.

It’s easy to confuse an open-end mortgage with actual home loans such as conventional, FHA, and VA. Just know that an open-end mortgage, or an open-end loan as it’s also called, works much differently than a traditional mortgage. Let’s take a closer look at the qualification requirements for this particular loan.

Getting approved

The application process is one of the few areas where an open-end mortgage and a standard mortgage are similar. Homeowners interested in applying for an open-end loan should expect to prove a number of qualifying factors such as income, assets, employment, and credit score. Your lender will also want to know the outstanding amount of your current mortgage.

The tricky part about obtaining an open-end mortgage loan is that not every lender has the same eligibility requirements. While you may have known ahead of time what it would take to qualify for an FHA or conventional mortgage, you are likely to face more unknowns when applying for an open-end loan.

Here are three general requirements to aim for, as referenced from connectrates.com:

A credit score of at least 660, though many lenders require a minimum score of 680 or 700
A loan-to-value ratio of 80% or less
A debt-to-income ratio of 43% or less

These requirements shouldn’t come as a surprise. Regardless of their specific eligibility requirements, your lender will want proof of a healthy credit score and a low debt ratio. Borrowers who can check those boxes are the most likely to get approved for an open-end mortgage.

How open-end loans work

Consider a borrower who gets approved for an open-end mortgage with a $30,000 limit. They can either use all $30,000 at once or let the funds sit in their account, using them more sparingly. Again, how you use this home equity line of credit (HELOC) is completely up to you.

So how do you go about paying back an open-end loan? First, it’s important to understand the draw period and the repayment period of the loan. Borrowers can only use their funds during the draw period. So, should you use $15,000 of your available $30,000, you would pay interest on $15,000. Similar to other forms of debt, you would then be responsible for the minimum monthly payment owed based on the interest you used.

One key piece to understanding open-end loans is that, as a borrower, you can pay as much as you want each month, not just the interest. Plus, the sooner you pay down the principal, the sooner you can use those funds again. Let’s go back to our previous example. If you used $15,000 of your available $30,000 but then pay back $10,000, you would have $25,000 available for use.

Now that we’ve explained the draw period of an open-end mortgage loan, we can move on to the repayment period. Once you’ve reached this part of the loan, you can no longer draw your funds. Per connectrates.com, the final 20 years of an open-end loan consists of the balance amortized with a fixed or adjustable interest rate. Check with your lender to see if they offer a fixed rate through the entire term of your loan, as this option could save you a pretty penny in the long run.

Is it right for you?

An open-end mortgage loan, or any HELOC for that matter, provides many borrowers with much-needed flexibility. Whether you need significant funds for medical bills, car repairs, home improvements, or another reason, applying for an open-end loan could be the right financial move. You may find this loan especially helpful if you don’t have an emergency savings account.

Then there are the disadvantages of an open-end mortgage loan. Should you miss even one payment, you’re essentially putting your home on the line. Then there’s the reality that you could end up underwater with your loan if your home’s value ever decreases.

A note about All-in-One Mortgages

An All in One Mortgage from American Financing could be the best fit for your situation. In contrast to an open-end loan, an All in One Loan carries no payment. This first lien HELOC can help you lower your home loan principal and potentially save you tens of thousands of dollars in mortgage interest.

Here are some of the reasons to pre-qualify for this loan:

Principal payments are made via direct deposit, which lowers your outstanding daily balance and interest.
Less money spent on monthly mortgage interest allows you to pay off your loan sooner, build equity faster, and free up income to meet other financial objectives.
Borrowers receive ATM cards, access to secured online bill pay, wire transferring, and unlimited check writing.

“It truly is a bank account,” says Chris L. Gustello, Director of Alternative Lending at American Financing.

See for yourself why the All in One Mortgage is gaining traction among borrowers.