What is a Closed-End Mortgage?
Closed-end mortgages are mortgage agreements in which the full repayment of the loan cannot be made prior to the maturity date of the mortgages. Unlike open-ended mortgages, there are no savings involved in paying off the closed-end mortgage. In addition, the homeowner will need the permission of the mortgage holder before being able to make use of the same collateral assets to secure a second mortgage.
A closed-end mortgage is sometimes referred to as a closed mortgage. This mortgage type is currently available in both fixed and variable interest rate models. While a closed-in mortgage may not seem like a great move for anyone purchasing a home, there are mortgage holders that will offer these types of financing with very competitive rates.
There are a couple of benefits associated with a closed-end mortgage for the mortgage holder. First, if the interest rate with the mortgage is a fixed rate, it becomes very possible to project the amount of return that will be received from the transaction. Because the homeowner will pay the same amount of interest regardless of whether the loan is paid off in advance or not, the lender knows exactly how much will be earned and collected over the duration of the loan. This greatly simplifies the record keeping for the lender, since there will not be the need to recalculate the amount of interest due in the event that the home owner chooses to pay off the mortgage early.
Second, a closed-end mortgage tends to discourage homeowners from attempting to commit the collateral assets to any other transaction. This means that in the event of default on the mortgage, the lender will have fewer issues to resolve before gaining control of the collateral and settling the outstanding debt. With less of an administrative burden on the mortgage holder, the closed-end mortgage can be very easy to manage. For this reason, many lenders find it worth their while to offer this type of mortgage at attractive rates.
The article talks about advantages for the lender in this kind of mortgage, but what about the borrower? Is it just that there's sometimes a lower rate?
My gut feeling is that people would be wise to avoid this kind of loan, because to me, paying off debt early is a good thing and you don't want to give that right! If you can't afford the house you want with a single, traditional, thirty-year fixed mortgage, maybe you should save up for a few more years. But I'm old-fashioned like that.
@cbcory - I think this term is sometimes used to refer to a loan that forbids you from taking out any other lines of credit on the home, but does not forbid you from prepaying the loan. I think most mortgages are neither open nor closed, because open means you can borrow additional money on the same loan (as opposed to filing a whole new application, possibly with a different lender), while closed means you can't prepay.
I have had the same question for some time and would also appreciate a clarification. Thank you.
I am a bit confused on the closed end loan explanation. If I pay extra towards the principal on my fixed rate, closed end loan, it will decrease the term which will in effect save me interest. You are saying that I have an open-ended mortgage, which I thought only applied to HELOCS. Please advise.
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