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Closed-End Mortgage


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TERMINOLOGY

A closed-end mortgage is a mortgage agreement between a borrower and lender that stipulates that the full balance of the loan cannot be paid off before the maturity date. This essentially means that a borrower cannot pay his or her mortgage off any earlier to save money. In addition to missing out on the savings that could come from paying the mortgage off early, the borrower must get permission from the lender before using the home as collateral to secure a second mortgage.

The closed-end mortgage offers no real benefit to the borrower, but it offers great benefit to the lender because it is a fixed amount of money on the loan. Since the borrower cannot pay the loan off early to save on interest, the lender can count on getting the entire amount, unless the borrower forecloses on the home. Even in the event of a foreclosure, because borrowers cannot easily place the home as collateral for other things, there is less for the lender to have to deal with, which makes the loan incredibly easy to manage when compared to other loan types. This is why lenders are notorious for offering this loan type to borrowers at an attractively low rate.