Open-end mortgage

Key Takeaways

• An open-end mortgage lets the borrower draw against a set credit limit more than once instead of receiving a single lump sum, and repaying a draw restores that much borrowing power.
• A home equity line of credit is the everyday example: the borrower may spend up to the limit during the draw period, then stops borrowing and enters a repayment period.
• A home equity loan is closed-end. It funds once in a lump sum, and paying it down does not open the line again.
• In Washington the lien for an open-end loan is recorded as a deed of trust for the full credit limit, and it stays on title until the borrower closes the line and the trustee reconveys.

What It Means

An open-end mortgage is a real estate loan the borrower can draw on more than once, up to a limit set when the loan is written, rather than a single advance handed over at closing. Repaying a draw restores that much borrowing power, the way a credit card does. Lenders and regulators call the arrangement open-end credit, and the security instrument stays in place across the whole cycle instead of being released after one payout.

The common form is the home equity line of credit, where the homeowner borrows against accumulated Equity, meaning the value of the home above what is still owed on it. The borrower may spend up to the credit limit during a set borrowing period, called the draw period, and when that period ends the line closes to new advances and the borrower enters a repayment period. Rates on these lines are usually variable, so the payment can move month to month, and the house secures the whole limit. The contrast is the Home Equity Loan, which is closed-end: it funds once, in a lump sum, and paying it down does not reopen anything. The same open-end label gets applied to construction loans that release money to a builder in defined increments called draws, since those funds also come out in stages rather than in a single advance.

How It Works in Washington

Washington secures nearly every residential loan with a Deed Of Trust rather than a true mortgage, and RCW 61.24.020 is written broadly enough to carry a revolving line. It provides that a deed conveying real property to a trustee in trust to secure the performance of an obligation of the grantor or another to the beneficiary may be foreclosed by trustee's sale. The obligation can be a fixed debt or a credit limit that rises and falls. Because the instrument secures the obligation rather than one advance, a Washington home equity line encumbers title at its full limit even in a month when the balance is zero.

Priority follows recording. RCW 65.08.070 makes an unrecorded conveyance void against a later good faith purchaser or mortgagee for value whose instrument is recorded first, which is why a line taken out after the purchase money loan records in second position and is routinely asked to subordinate when the owner refinances the first. Release is not automatic either. Under RCW 61.24.110 the trustee of record reconveys the property on written request of the beneficiary, or upon satisfaction of the obligation secured and a written request for reconveyance, so a borrower who wants the lien gone has to close the account, not just pay the balance to zero. Our rundown of the loan types brokers meet most often and our explainer on subordination clauses show where these lines complicate a deal.

Example

Tom and Ana Serrano own a house in Vancouver, Washington worth $520,000, with $260,000 still owed on their first deed of trust. A credit union approves a $100,000 home equity line of credit secured by a second deed of trust recorded behind the first. Their combined debt is $360,000 against a $520,000 value, roughly 69 percent.

In March they draw $45,000 to add a bedroom. Two years later they have paid the line down to $12,000, and they draw another $30,000 for a new roof, bringing the balance to $42,000. That second draw is the whole point of an open-end loan. A closed-end $45,000 home equity loan would have required a brand new application and a second closing. In year eight the draw period ends, the line stops accepting advances, and the balance converts to a repayment schedule. When the Serranos finally pay it to zero, they send the credit union a written request to close the account, and only then does the trustee record a deed of reconveyance clearing the recorded $100,000 lien from their title.

Common Mistakes and Exam Traps

• Open-end and closed-end describe how the money comes out, not what the interest rate does. A home equity line of credit is open-end and a home equity loan is closed-end, even though the same house secures both.
• The recorded lien matches the credit limit, not the current balance. A line sitting at zero still encumbers title until the borrower closes it and the trustee records a reconveyance.
• A construction loan that funds a builder in scheduled draws gets described as open-end because the money comes out in stages, but the borrower is not reborrowing repaid principal the way a credit line does.
• Federal closing forms do not follow open-end lines. 12 CFR 1024.8 exempts open-end lines of credit, meaning home equity plans, from the HUD-1 requirement, and these lines do not receive a Loan Estimate or a Closing Disclosure.