Understanding Collateral Mortgages

There is quite a bit of confusion around collateral mortgages, compared to conventional mortgages. We often encounter this problem when we see a mortgage amount on a title that is the same as the sale price when the home was purchased. There is some concern for realtors when this occurs, since it may seem like there isn’t enough equity to fit the terms. However, the main reason this occurs is because of a collateral mortgage. Banks are pushing this to borrowers more than ever before, and many first-time homebuyers don’t understand the fine print.

A collateral mortgage is basically a promissory note secured by the mortgage on a property. When some lenders explain the collateral mortgage to the borrower, they might spin it to sound like they have extra money in a line of credit that they can borrow against down the road for any home expenses. However, the amount that is registered on the mortgage is generally a lot higher than the purchase price, which means that a new homeowner might owe more on his or her mortgage than the home was worth at the time of the sale.

Another concern about collateral mortgages is that they limit the flexibility in moving your loan to another bank or lender. If you do try to switch or refinance to get a better rate, you will most likely have to pay any closing costs and other fees out of your pocket. You are not able to transfer the collateral mortgage loan to another lender, which is a much simpler process on conventional mortgage loans. We encourage all of our clients to use caution when considering a collateral mortgage loan, and feel free to contact us if you have any further questions.