Definition of "Closed-end mortgage"

Connie  Vanderpool real estate agent

Written by

Connie Vanderpoolelite badge icon

Samson Properties

A closed-end mortgage is a mortgage in which the collateralized property cannot be used as security for another loan. See also open-end mortgage for a better understanding of the differences between the two options.

 

The definition of a closed-end mortgage is a mortgage that is restrictive in the sense that the lender cannot prepay, refinance, or renegotiate it. If they do, the lender will be required to pay breakage costs. In contrast to other types of mortgages, in closed-end mortgage loans, the collateral pledge can only be for an asset that was not used in a pledge for another mortgage.

 

As analyzed, the closed-end mortgage loans meaning benefits home buyers the most, especially those that do not intend to move to another house or sell anytime soon.  A closed-end mortgage also allows for a long-lasting commitment at a lower interest rate, unlike an open-end mortgage. The closed-end mortgage was designed for home buyers, young families who want to purchase a home at the start of a life shared together.

How do Closed-End Mortgages work?

A closed-end mortgage is considered less risky for homebuyers and can come with a fixed or variable interest rate. It also imposes certain restrictions on the borrowers and limitations. These can make it difficult for lenders to deal with as it affects the financial aid they could otherwise access if not for this mortgage. Some of these restrictions are:

 

  • No possibility of repayment, renegotiation, or refinancing;
  • It blocks the possibility of taking out a home equity loan;
  • There are penalties for lenders who decide to pre-pay their mortgage principal.

 

There are some good aspects that make it, as mentioned above, a less risky option for homebuyers. As it was stated in the beginning, a closed-end mortgage does not allow for  collateral to be used to pledge other mortgages or loans. This means that in the unfortunate situation when a borrower defaults their mortgage, goes bankrupt, or is unable to meet their payments, their collateral will not be taken away by other lenders. In order to improve the borrower’s situation, the lender can also lower the interest rates for the borrower.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

In between, intermediate, intervening; passing an interest from a principal to a second party and then to a third party. ...

Same as term development: Process of developing an area by planning and building homes, shopping centers, schools or churches. The development process includes the construction of streets, ...

A void property is a real estate property that is immediately available for new owners or renters as it is vacated. Void real estate properties can be occupied at a short notice as no ...

(1) Bracket used to support an extended eave or cornice on the outside of a house. (2) Truss or beam projection beyond its base and supported by its strength and rigidity, such as a ...

Exposed heating unit located within a room that transfers heat generated by hot water or stream through conduction. The surrounding air circulates around the radiator using convection ...

Many homebuyers or real estate investors only think of mortgages when it comes to financial aid in real estate purchasing. Lately, with the increasing desire of homebuyers to not be ...

Method of describing a real estate property offering by a developer in lieu of a prospectus. ...

Last installment payment, substantially greater than the previous installment payments. The unpaid balance of a long-term loan is paid off in a lump sum at the end of the loan term. ...

The term collusion may make you think about colluding from the start, and you wouldn’t be far from the truth. The definition of collusion is a secret, non-competitive, and, at times, ...

Popular Real Estate Questions