Closed-End Mortgage
Does a closed-end mortgage mean there might be an end to the mountains of paperwork that must be signed at a home purchase closing? Unfortunately not.
A closed-end mortgage is a rather restrictive type of mortgage, but if you are willing to put up with the restrictions, you can save a lot of money by getting a lower interest rate.
So what are these restrictions and how do you decide if you can live with them?
For starters, you can’t refinance the home to get an even lower interest rate down the road. (It happens.) You also can’t renegotiate the terms of the loan such as changing from a 30-year mortgage to a 15-year, or vice versa. The big restriction is that you can’t take out a home equity loan or a home equity line of credit. These types of loans can come in very handy if you have a large home improvement project or need extra cash for an emergency. Lastly, the bank won’t even let you prepay the mortgage without paying a substantial “breakage fee.” Let’s say Tom has decided he made a big mistake taking out a closed-end mortgage and wants to refinance with another bank to get a new open-end mortgage. He would first have to pay off the closed-end mortgage and pay the breakage fee to his old bank.
The reason for all these restrictions? The bank figures that, if they are going to offer a lower mortgage rate, they don't want to have to stand in line with other lenders if you happen to default on your mortgage loan. Less risk to the lender means a lower rate for you.
If you think you'll be in your home for a long time, and you make enough money so you would never need a home equity loan, a closed-end mortgage might be for you. But none of us has a crystal ball (unless you're a fortune teller), so make sure you know all the trade-offs before you sign on the dotted line(s).
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Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello