What is an Open-End Mortgage?
Generally, an open-end mortgage is one that remains open after it has been delivered to the county recorder, and it permits the lender/mortgagee to make advances on the loan that are secured by the original mortgage, but only to the extent the total indebtedness does not exceed the maximum principal amount identified. An open-end mortgage acts as a lien on the property described in the mortgage.
For example, let’s say borrower takes out a loan for $100,000 that the lender secures with a mortgage, and borrower draws down $10,000 in principal under the loan at closing. With an open-end mortgage, the lender may loan the additional $90,000 in principal and continue to secure the full amount of the loan with the original mortgage.
Ohio’s Open End-Mortgage Statute
In Ohio, ORC § 5301.232 governs open-end mortgages, and lenders must be certain to comply with the requirements of the statute in order to reap the benefits of an open-end mortgage. Specifically, to comply with the Revised Code, in addition to the parties intending it to be an open-end mortgage, the mortgage must state at the beginning that it is an “open-end” mortgage and indicate the total amount of principal (exclusive of interest) that may be outstanding at any time.
Why Lenders Use them
Lenders use open-end mortgages to advance loan funds to borrowers while maintaining a first priority lien and without having to issue a new mortgage after each advance. However, this right is not absolute. The right is contingent upon whether the lender has the option to advance future loans or the obligation to advance future loans – the distinction matters.
When the future loan advances are optional, an intervening third party loan or mechanics lien may take priority over future additional advances. If the original lender/mortgagee makes additional loan advances after having received notice of the subordinate mortgage loan or other lien, and it was not obligated to make the advance, then it loses its first priority lien with respect to those later advances However, when the lender/mortgagee has an obligation to make an additional advance on the mortgage, then its lien on the additional advances will relate back to the time the original mortgage was recorded and will take priority over any intervening third party loan, including a mechanic’s lien.
There is flexibility under Ohio law as to the contractual language needed to make an advance obligatory. A contractual obligation to make an advance arises even if the advance is conditioned upon the occurrence or existence, or the failure to occur or exist, of any event or fact. The Ohio Supreme Court has explained that as long as the language requires the lender/mortgagee to advance a certain and definite sum in a particular manner then it will be deemed obligatory even if no advancement is ever actually made. Thus, a properly drafted open-end mortgage can ensure a lender maintains its first priority lien.
Borrower’s Right to Limit Indebtedness; Notice requirements
A borrower/mortgagor can limit the amount of the indebtedness secured by the original mortgage to the amount then outstanding. To do so, the borrower must serve a notice to that effect on the lender/mortgagee prior to recording the notice. The notice must reference the volume/page number or the recorder’s file number, and the borrower’s signature must be notarized.
The above information is meant to provide a brief summary regarding open-end mortgages and is not intended to cover every issue that might arise in the context of an open-end mortgage.