Collateral Mortgage Warning!
Do you know what a collateral mortgage means?
Are you aware that, if you have a mortgage with some of the major 6 banks and some credit unions, you have a so called COLLATERAL mortgage.
If you are like the majority of population, and buy and sell homes every few years, refinance often for more equity cash, or simply switch banks for best interest rates, this can be a HUGE problem to you! This has happened way too often in last few years to my own clients by their own banks. I think it is important that I share this information with as many people as possible.
Here is what collateral mortgage means to you.
1. Your current bank has registered more money on your mortgage than what they have actually lent you to purchase your home.
Banks claim that this amount is there when you need more money. It is designed this way so you will not have to re-apply for more money, thus saving you fees and credit checks. The truth is, there is much more to it and banks may have failed to disclose it to you.
Even if you read the fine print, unless you are a lawyer, you will not understand the trap you’ve just fallen in.
Let’s say you are looking to get a 2nd mortgage from another lender, to take out some more equity while you are still with your current lender. You will likely be declined. If you want out and to part ways with your current bank, you will have to pay a hefty legal bill. In other words, YOUR BANK HAS LOCKED YOU IN THEIR TRAP- you can not go to another lender without bleeding out to DEATH.
2. Your bank will issue to you a line of credit attached to your mortgage. This means when you apply for the mortgage with your bank, you will have to qualify for a HIGHER AMOUNT than what you actually intend to borrow, (which in some instances you may not qualify for, if you already have a lot of debt).
3. If you use this extra money, from this “additional” line of credit, and not pay it on time, your bank could RE-POSES YOUR HOME. If you have just a regular credit card, and you default on your payments, no one will kick you out of your home. BIG DIFFERENCE!
4. Until a few years ago the largest banks were getting away with this scheme WITHOUT even disclosing it to their customers. The irony is that the same banks who use this process to lock in customers, will also NOT accept clients who are trying to move from another lender’s collateral mortgage. This is because of the hefty legal fee they would have to pay to the lawyer’s to have you released from the competitors collateral mortgage.
5. The PENALTY AMOUNT to break a collateral mortgage early is usually border-line insane. If you are in a collateral mortgage, forget trying to refinance until you have ended your term, or be prepared to pay as high as 10’s and 10’s of 1,000’s in penalties to your lender (yes you read that right, happened to some unfortunate clients I have).
If you are planing to sell your current home or planing to buy a home but already have a mortgage, please check the paper work you signed with your bank.
If you are not sure, give me a call and my in-house mortgage broker will take a look at it for you. They have found ways to work with banks and try to get you out with minimal damage. 647-892-5007