Close ended mortgages or second mortgages carry higher risks for lenders.
For homeowners there is nothing more exciting than finding out they have established equity in their home. Through careful planning, on-time mortgage payments and market changes, a home's value will eventually retain a higher value than the amount owed to the bank. The difference between the remaining balance on a home's mortgage and the value of the home is the amount of equity the homeowner has to borrow if needed. A close ended home equity loan is one option for homeowners wishing to cash out a home's equity.
What is a Close Ended Mortgage?
A close ended home equity loan is, in essence, a second mortgage. For lenders, this type of loan or mortgage carries a much higher level of risk. The increased risk is attributed to the fact that with one home serving as collateral for two mortgages, a default will cost one of the lenders money. If a home is defaulted on and there are two mortgages in existence, the first mortgage would be paid off through a foreclosure auction before the second mortgage would be repaid.
How is the Money Received?
A close ended home equity loan or second mortgage is characterized by a lump sum of money borrowed on the home. This money is not revolving in that the homeowner will not be able to borrow any additional money until the close ended home equity loan or second mortgage is paid off in full.
How Much Can be Borrowed?
Lenders will most often allow 100% of the home's equity as a basis for the amount the homeowner will be allowed to borrow. In very rare cases, a lender may exercise the option to allow more than the equity in the home to be borrowed, but this is not the common practice.
What is the Repayment Term?
Repayment of a close ended home equity loan usually occurs over a period of 15 years with a fixed interest rate. Homeowners are offered the option of a shorter repayment period with a balloon payment at the end of the second mortgage repayment schedule.
What Can be Purchased With the Loan?
Close ended home equity loans are available to homeowners for any purchase they desire. The lender does not place any rules or regulations on what can be purchased with the monies borrow. In most cases, homeowners will borrow a second mortgage for large expenses such as college educations, home improvements, or family catastrophes.
A close ended home equity loan is a loan based on a home's market value minus the current mortgage amount. Homeowners have several options when choosing a close ended mortgage, but must remember lenders are more resistant to granting second mortgages due to the higher risk of default.
