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An open-end mortgage is a home loan that allows borrowers to draw future advances as the property value appreciates.
Loans with such flexible terms usually come with a ceiling or limit stipulating the maximum amount the borrower would be able to draw from the account.
As the specific value of a home cannot be predicted in future, this limit is set by specifying a loan to value limit on the facility.
Home loans with open end clauses usually allow a borrower to increase the loan size from the prevailing loan balance up to the original loan amount. When the required extra funds exceed the initial loan quantum, then the lender might put the case through another round of credit assessment though with less stringent criteria.
This also gives a lender a good reason to justify increasing the interest rate.
A good reason why borrowers would choose to trigger open-end clauses is that they would save on the expenses associated with loan closing.
Refinancing with cash out with another lender would result in having to pay for loan closing all over again.
While such open-ended mortgages give flexibility to borrowers, it can also be badly abused. This is why lawmakers are getting stricter on it.
For example, a homeowner has an open-end home loan and takes on a second mortgage, he could already be 100% financed.
But if the open-end mortgage is drawn upon, then the total loan amount can easily exceed 100% of the home value.