Are You LOCked Into A Collateral Mortgage?

A collateral mortgage is a mortgage with a line of credit (LOC) embedded in it. Why should you care? The mortgage benefits and risks are now those of the mortgage and other forms of debt (an example being the line of credit) even if this debt is not used. If you can access credit in some way, you have to be approved to use it, and whether or not you use it, the risks are viewed the same way by the bank. In the case of a credit card, you would have to be approved before you start spending any money. What are the benefits of the collateral mortgage? If you have other forms of debt other than your traditional mortgage, and need access to cash frequently, this product may be useful to you because you pay fewer fees and you have access to extra money more easily. The reason why fees are less is because approval for the existing debt and future debt is made available at one time, which reduces legal fees and administration. What are the problems? Since a collateral mortgage registers your entire value of your home and 25% over and above that value providing you have 20% equity in it (1), you cannot easily switch your lender unless you discharge the whole mortgage. With a conventional mortgage, or can borrow on any amount over and above the mortgage amount if you have equity or collateral to back it up - an example being a second mortgage. In a collateral mortgage, doing this will usually involve mortgage penalties and legal fees. If you want to borrow more money, you have to go to the same bank for all of your borrowing needs. If you miss mortgage payments or go into default, the bank can raise your interest rate up to 10%. This cannot be done with the conventional mortgage. What to do? Read the fine print on the mortgage contract. Take time before you sign it. If you know a lawyer who understands mortgage contracts, have them go over it to make sure nothing was missed. Get educated as much as you can so you know what questions to ask. If you don't know the terminology, ask the lender about hypothetical situations and what the options are. As an example, if you ask "if I wanted to take out a second mortgage, how does that work?" If they say that is already approved, this is more likely to be a collateral mortgage. You could also ask "if I wanted a line of credit, how would I get one?" If the lender says you already have one, this may also be an indicator that you have a collateral mortgage.