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Closed-End Mortgage
A closed-end mortgage refers to a restrictive home loan which has been fully funded at closing and no further loans will be offered to the borrower with the particular property as security.
It usually contains a “no further encumbrances” provision in the contract.
In most cases, prepayment is not allowed or can be met with huge penalty fees.
This is as opposed to open-end mortgages where the principle can be increased in future when property value appreciates.
Most home loans taken by regular homeowners to purchase their homes are closed end mortgages.
This is partly due to deterring homeowners from taking on too much financial risks in future. Most homeowners would also seldom take on more loans out of fear of putting too muck risk on their homes.
However, it must be noted that just because a house has a closed-end home loan does not mean that more equity cannot be drawn from it.
When required, home owners can still obtain second mortgages or refinance the existing loan to obtain more funds. This might be subject to approval from the existing lender and a fee might be charged.
Taking on more loans would of course need to restructure their loans which might lead to an increase in monthly repayments.
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