Many home owners are attracted to open end mortgages for a number of reasons. First, let’s explain exactly what an open end mortgage is to get a better idea on how to use them to reduce debt. An open mortgage primarily gives the home owner the opportunity to pay off the loan faster. Homeowners can take out additional advances on the same mortgage contract after a certain amount of equity is earned. The equity of the mortgage builds over time in which the homeowner, if they wish to do so, can take an advancement on that equity in order to pay off other high interest debts such as credit cards. Credit cards always have higher interest rates than mortgages do.
Let’s say the homeowner is paying 5% interest on the mortgage loan and they have credit cards in which they pay 15% interest on. The homeowner with an open end mortgage can borrow money on their equity to pay off their credit cards. This means they are essentially using their mortgage loan as a 5% interest credit card. In turn, the homeowner will save money every month but cutting their interest payments down. They can then apply the money saved to paying off their mortgage even faster.
Financial institutions that make open end mortgages available to their customers have set rules on how open end mortgages can be used. For example, a bank may require a certain amount of equity to build up before they allow the homeowner to take an advancement on their mortgage. Other banks may require a certain amount of time and only allow a certain amount to be refinanced. In order for the homeowner to begin a new refinanced mortgage, they first must have their home appraised. Financial institutions will allow the homeowner to borrow money on their mortgage as long as their outstanding principle
does not exceed up to 80% of the appraisal.
Mortgages that don’t have an open end mortgage clause in the contract do not allow the homeowner to take out additional advances in the future. Open end mortgages are more appealing and practical for long term homeowners. In the future, they can take advances on their mortgage in case of emergencies as well. These additional loans can also be used for the upkeep or remodeling of the home. Corporations that deal with open end mortgages can issue unlimited bonds under the original mortgage contract. These corporations however, do not provide any protection for the bondholders.
Open end mortgages can be looked at in two different ways. Some home owners do not like the idea of open end mortgages. Taking additional advances on the home loan requires refinancing. Refinancing extend the amount of the loan and extends the amount of time to pay off the home loan. Some people view this as extending debt. However, if applied correctly, home owners who have an open end mortgage can pay off their loan faster than those who do not. As the cost of living increases, home owners without open end mortgages are forced to use higher interest loans and credit.
These higher interest loans and credit will hinder the home owner’s opportunity to pay off their mortgage before the end of the contract. They will be spending all their time paying off high interest debt. Open end mortgages allow the home owner to jump ship with high interest debt and that is what makes it a valuable asset to have. Anyone that is in the market for a new home should do their research and find out what type of mortgage will work ideally for them. Not everyone is looking for the same type of flexibility that open end mortgages provide.