Posted by Bill on
There are companies and individual lenders who specialize in second mortgages that are doomed to fail so that the lender can take your home for much less than the market value. I am going to show you how it works so you will know what to watch out for.
This is the true story, unfortunately, I hear it from lots of people who come to see me after getting into a mortgage they cannot manage.
Each time my client explains, something unusual has happened; a sickness, death, lay off et cetera, and the credit cards get maxed out. They struggle for a while and fall behind on payments to creditors. Sometimes collection agents convince them not to pay their mortgage so that a payment can be sent to the collection agent. Collectors tell them that it’s better to pay the credit cards to keep their good credit and let the mortgage fall behind. (Take note … that is a false statement).
The desperate homeowner diverts mortgage money to pay the collection agents.
Soon the collection agent demands they get a 2nd mortgage to pay off the balances on the credit card debt and often demand that the struggling homeowner goes directly to the lender that the collector recommends. They paint a very nice picture that this particular lender will give them money even though the banks have turned them down. (That is correct – that is why these lenders are in bed with some collection agents).
Soon the homeowner gets the 2nd mortgage which is high interest and repayable monthly at “Interest Only”. The mortgage always has a one (1) year term, but they are told not to worry – it can be renewed again at the end of the year for an additional 1 year term. (Of course that little statement is not written into the mortgage document). They are also told this mortgage will give them an opportunity to rebuild their credit over the coming year. (Only problem is – that will definitely not happen – see further down for reasons).
They pay for 1 year and the lender refuses to renew the mortgage. A demand is made for full payout of the 2nd and foreclosure proceedings commence. The homeowner hunts around at every bank and Mortgage Brokerage firm for replacement financing but gets turned down everywhere.
The lender forecloses and the owners are evicted with the Sheriff giving them seven days to move out.
Restoring your credit in 1 year – true or false?
False: The reason they cannot refinance after one year is that even after you have paid off a credit card in full that has been with a third-party collector, the Credit Bureaus continue to report that event for SIX (6) YEARS as an R9, which if you don’t know the code, that is the same rating as though you had filed a bankruptcy.
The lenders know this and that is why the financing is interest only for 1 year at 15% or higher. They also charge a lender fee and a broker fee of $5,000.00 on average, and the legal fee will average $1,500.00.
On a $20,000.00 loan at 15% interest only, 20 year Amortization, and 1 year Term = $256.76 per month
$256.76 X 12 = …………………………$ 3,181.12
Lender Fee ……………………………….. 2,500.00 Deducted from funds
Broker Fee ……………….……………….. 2,500.00 Deducted from funds
Lawyer Fee …………….…………………. 1,500.00 In advance
Appraisal Fee …………………………. 300.00 In advance
Closing Costs …………………………. 500.00 Deducted from funds
Total …………….. $ 10,481.12
In this model the homeowner could receive $14,500 but Municipal property tax must be paid first, then the first mortgage must be brought current if it is in arrears and then the credit cards get paid down. A very costly process.
If the property is foreclosed on and sold the past homeowner will be sent another bill for any shortfall and the smallest billing I have seen for this event was $7,000.00.
Compare this event to a recent client’s solution:
[I have rounded off the numbers.] This couple had $63,000.00 in credit card debt that was costing them $2,050.00 per month to carry but they were behind on some and it was getting worse.
Their property was worth $315,000.00 and it was mortgaged to 60% loan to value (LTV) at $189,000.00 They had reasonable income but spent beyond their means. They would have to mortgage their property to 85% LTV but would not be able to make the new mortgage payments.
We provided counselling to help them budget and they filed a Consumer Proposal to pay off the credit card debt. The proposal was for $47,250.00 or 75%LTV with monthly payments at $787.50 per month for 60 months without interest. The remainder of the $63,000 will be forgiven when the proposal is paid in full.
They also lost their good credit rating but that was going in the tank anyway, but they kept the main item – their home. Their monthly payments were reduced by $1,262.50 and they pay no interest on the proposal.
Is that not a better solution?
If you are struggling under debt and you own property consider the following before you make the biggest mistake of your life.
What are my priorities?
a) How many years do I want to keep my home before trading up, down, or selling and renting?
b) Will my job force me to relocate any time soon?
c) What are my family needs – will the family increase or decrease any time soon?
d) Do I know enough about my property value and current market trends?
e) Should I sell instead of increasing my mortgage?
f) Can I afford the payments on new financing without needing to run up my credit cards again?
g) Can I change my spending habits and sacrifice some luxuries to pay down debt rather than looking for new mortgages?
h) Have you tried to do this before and now have a second mortgage plus renewed credit card debt? If so you already failed by using this method, why would you try this again with a third mortgage or by rolling the 1st and 2nd into a new first at a higher interest rate?
Make a plan and stick to it:
The answers to these questions will help you and our trained Insolvency Counsellors to determine whether you should be selling, refinancing, filing a Consumer Proposal, or filing for bankruptcy.
Did you know you could file bankruptcy and still keep your Home, Car, RRSP’s, and other valuables?
If you are considering this avenue I strongly recommend you engage one of our Insolvency Counsellors to assist you.
I do not recommend mortgage refinancing that consolidates credit card debt over 75% of the appraised value of your home when added to your existing mortgage. There are other options that are much less expensive and that keep your home from being threatened by Claim Jumpers.
Before you refinance your home ask yourself the serious questions, and call us for a free confidential consultation or complete our form. If nothing else you will be better informed after the meeting.
disclaimer: The contents of this post is based on circumstances current at the time of the post and are intended for general knowledge. For more specific answers to your questions about your own circumstances use our contact form or post a comment below. NOTE: For a FREE, confidential analysis of your situation click here.
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