It occurred to me, as I was writing my blog post on Mortgage Accelerator Programs, that an explanation of the differences between Open Ended and Closed Ended Loan products might be helpful.

Open Ended Loans: are loans that allow you to put money in, (make a payment) and take money out (make charges or cash with-drawls).  These loans have credit limits that you cannot exceed without penalty.  They are flexible loan products that provide the consumer with options.   On an open ended line of credit you only pay interest if a balance is kept at the end of the statement period.  One of the benefits of an open ended line of credit is that the credit limit can be increased if the card is managed responsibly!

Examples:  Credit Cards such as Visa, Discover, American Express and Sears.  The cards allow you to charge up to a certain limit.  Lines of Credit such as HELOC (Home Equity Lines of Credit)

Closed Ended Loans:  These are loans that are set from the beginning of the loan.  You can make payments into, but cannot take money out.   The money is loaned at a set amount, and the consumer agrees to make payments towards the principal and interest.  Also known as installment loans, you can make additional principal payments and pay them off early, but once paid you do not have access to the equity in the property that you have purchased.  Typically, the early years of the loan is primarily interest and principal is paid towards the end of the loan period.The only way to access equity is to sell the property, or to get a new loan i.e. refinance.

Examples:  Car Loans, 30 Year Mortgage, 15 Year Mortgage, Adjustable Rate Mortgage, 5/1 ARMs, Dell Computer Loans etc.

Understanding the difference between Open Ended Loans and Closed Ended Loans is critical in understanding the power of Money Merge Accounts or Australian Mortgages. 

The Australian Mortgage uses an open ended HELOC as a primary mortgage tool which allows the homeowner to make deposits (payments) into  and draw money out as necessary.  The net effect is cancelled interest and a quicker repayment of the principal balance IF the consumer spends less than them make each month.

The Money Merge Account does the same thing, but creates a system where the Open Ended Line of Credit works in conjunction with the Close Ended Mortgage.  Periodic transfers of equity from the Open Ended Line of Credit take place into the Close Ended Mortgage, creating a systematic interest cancellation system that can be quite effective in helping consumers pay down debt and pay off the mortgage early.

Other Posts in this Series:

What is an Australian Mortgage

Mortgage Acceleration Programs Explained

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