An open-end mortgage allows you to borrow funds to buy a home, then borrow more as needed to renovate it. This type of loan isn’t easy to get, but fortunately, it isn’t the only option out there if you’re buying and fixing up a property. Here’s an overview.

What is an open-end mortgage?

An open-end mortgage is a type of loan that allocates enough funds for a home purchase, then allows you to draw more, as needed, to improve the property. In effect, you can increase the loan principal, up to your approved maximum.

Open-end mortgages are very difficult to find, however, and they aren’t available in every state. To get one, you might need to work with a mortgage broker who specializes in this type of loan.

In some ways, an open-end mortgage is similar to a home equity line of credit (HELOC), and a HELOC is sometimes referred to as an open-end loan. Unlike a HELOC, though, you can only put any additional funds drawn toward renovations.

Open-end vs. closed-end mortgage

An open-end mortgage differs from the so-called closed-end mortgage, which comes with a low rate, but also fees and limitations. Typically, you won’t be able to prepay or refinance a closed-end mortgage without pay closing costs. You’ll also need to pay a fee if you want to get a home equity loan (second mortgage).

How does an open-end mortgage work?

When you get an open-end mortgage, you’re approved for more than you need to buy the home, so you’ll only use some of those funds for the purchase. Afterward, you can draw on the remaining funds to pay for home improvements. These draws are sometimes known as “future advances.”

You can only draw for a certain time frame, however, referred to as the draw period.

Just like a regular mortgage, you’ll make principal and interest payments on the amount used to buy the home. If you decide to use more later on, you’ll make payments on that portion, too, all in one monthly payment.

You don’t have to draw the entire amount you’ve been approved for, though. You’ll only pay interest on what you actually use.

Example of an open-end mortgage

Let’s say you were approved for an open-end mortgage in the amount of $500,000 and buy a home for $440,000. You’ll begin repaying principal and interest on the $440,000. If you decide to draw on the remaining $60,000 ($20,000 to start, for example), you’ll begin repaying that in addition to the payments you’ve been making. You’ll pay both in one monthly payment.

Open-end mortgage pros and cons

Pros

  • You can finance a home purchase and renovations with one loan and one monthly payment. This means you can buy a less expensive home and tailor it to your needs and preferences.
  • You won’t have to repay what you don’t use.
  • Unlike the case with a first mortgage and a refinance or second mortgage, you’ll avoid paying closing costs for two loans.

Cons

  • It’s difficult to find a lender that offers open-end mortgages, and some states don’t allow them.
  • You can’t draw more than the maximum, so if your home improvement projects go over budget, you’ll need to obtain more financing via another loan.
  • You might borrow more than what you can reasonably repay, especially if you’re up against the end of the draw period.

How to qualify for an open-end mortgage

Although not available everywhere, if you’re able to find an open-end mortgage lender, you’ll need to get your finances in shape just like when you apply for a traditional mortgage. While requirements vary by lender, this might include:

  • A credit score of at least 620
  • A debt-to-income (DTI) ratio of no more than 43 percent
  • A down payment of at least 20 percent

Alternatives to an open-end mortgage

It can be challenging to find an open-end mortgage. If you need financing to buy and renovate a home, here are guides to other options:

  • Fannie Mae HomeStyle Renovation loan: A conventional loan for a home purchase plus renovations worth up to 75 percent of its after-improvement value
  • FHA 203(k) loan: A conventional loan for a home purchase plus renovations. The FHA’s Limited 203(k) program is available for projects up to $35,000. The standard 203(k) loan is available for projects that cost more than $35,000.
  • VA renovation loan: For eligible servicemembers and veterans, a VA loan for a home purchase plus renovations worth up to after-improvement value
  • USDA 504 Home Repair loan: For very low-income homeowners in eligible locations, a USDA loan for renovations up to $40,000
  • Home improvement loan: A personal loan for renovations, with amounts and rates varying by lender