On The Case: Open-Ended Mortgages and Foreclosure vs. Forbearance
What is an Open-ended Mortgage?
An open-ended mortgage basically means that you can request an increase in a loan amount from a lender. This type of loan is for people who might need more flexibility than usual. For example, if they are buying land and then plan to build later, or in a situation where they believe it’s possible they will have to finance more at some point.
The big advantage of an open-ended loan is that a borrower can request additional funds without having to go through the loan process again. This means considerable savings on fees, closing costs, etc. However, there are strict limitations. An open-ended mortgage is basically like a home equity loan. A borrower can ask for more as long as certain conditions are met based on the value of the home and the percentage of borrower equity in the property. Secondly, there is usually a ceiling on the amount that can be requested. Finally, because the borrower may request more funds at different times, the interest rate will vary. If the homeowner first obtained a loan with a 4% interest rate, but then rates went up to 5%, they will pay 5% on the extra amount they borrow, although their original loan amount would still be fixed.
What is the Difference between Foreclosure and Forbearance?
Basically, forbearance is a step taken to avoid a foreclosure. If a borrower is having temporary difficulty making their mortgage payments due to sudden illness, loss of a job, etc, then they can ask for a forbearance in which their lender agrees to delay filing for a foreclosure. This gives the borrower a chance to get back on track. Forbearance might involve giving the homeowner a break on making any payments for a short while, a reduced monthly payment, or payment of just the interest portion of the loan, etc. However, it is understood that there is a designated time-frame and deadline on the granting of a forbearance. The borrower must work out a way to get back on their feet within that time. If that doesn’t work, then they should consider a loan modification, which generally extends relief over a longer period of time.
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