Collateral mortgages are those wherein the borrower can borrow a bigger sum as they pay more toward their mortgage or if the price of the home increases. This can happen almost every year and hence every year the sum the lender can borrow from their home equity goes up. There are no withdrawal costs either. All the borrower is required to pay is interest on the amount withdrawn. To be able to borrow this money, the home equity is used as a collateral asset against the borrower's line of credit. So with the increase in your home equity, you can ask your lender for more credit with a Home Equity Line of Credit. This is one of the major differences between collateral mortgages and traditional mortgages - as in a traditional mortgage, the homeowner would have to refinance the mortgage to borrow a bigger sum.
Something you definitely need to know about collateral mortgages is that they can be discharged only by the lender. If you are changing your lender, you would need to pay a fee that can cost you anything between $2,400 to $9,000. You may also have to pay a legal fee and a penalty fee for switching lenders. To calculate this penalty you can try using a mortgage penalty calculator or seek professional help. It is only advisable to switch lenders if you are getting a mortgage with a lower interest rate.
A collateral mortgage cannot be transferred to another lender or discharged because of the fact that it has not been registered with a municipal registry office. Hence, to refinance it, you would have to ay up legal fees to discharge your mortgage as well as register it. Moreover, you may also be asked to pay up loans that you may have taken on your collateral mortgage before you can switch lenders. In traditional mortgages, this is directly transferred to the lender you are switching to.
You may wonder what is the amount that can borrow with a collateral mortgage. This can be done in three steps. The first step involves the lender determining the maximum amount that is borrowed in the lifetime of the mortgage irrespective of the increase in home value. This is done by multiplying the home value by 1.25x. Also remember, the amount your lender arrives at is not what you can borrow immediately.
The next step is to know the limit on the basis of home equity. As you pay your mortgage or there is a rise in the property value, the amount you can withdraw also rises, but it can be a maximum of 80%. The last step is deducting the mortgage balance. When you know your loan to value limit, you just need to deduct the principal you still owe on the mortgage. A mortgage amortization calculator can come in handy to do this.
If you want to apply for a collateral mortgage, or need help and support to understand it in depth, do write to us at LendX Financial in Brampton, Greater Toronto Area.