- Elias Zeekeh, MBA, CPA, CMA
Conventional Vs Collateral Mortgages: What you need to know.
In 2014 banks became required to disclose general information on collateral mortgages on their website. This was due to confusion on behalf of consumers as well as widespread negative media coverage. So what exactly is the difference between collateral and conventional mortgages? Below is what you need to know.
With a conventional mortgage the amount of the actual mortgage is the same as the amount that is registered on your home. Therefore, if you purchased a 100k home and got an 80k mortgage then the amount registered on title would be 80k.
Meanwhile with collateral mortgages the amount registered on title can go up to 125 percent of the property value. So in the case of purchasing a home for 100k the amount registered on title could be up to 125k. The benefit of the collateral mortgage is that you can more conveniently refinance the property in the future and avoid the legal fees and other refinancing costs. You will still need to apply for the loan and get an appraisal to substantiate the new loan amount.
The downfall of the collateral mortgage is that it can restrict you from getting financing on your home from another institution. If your bank doesn’t approve the refinance or you don’t like the rate you are being offered you may not be able to get secondary financing from another financial institution or you may have legal fees in order to discharge the mortgage.
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