Mortgage Mishmash

Multiple-term Mortgages

There are a large number of leading lenders who proffer mortgages comprising as many as five diverse fragments or blocks that are also known as 'multiple-rate mortgage' or 'split-level mortgage'. In such a system, the borrowers are allowed to split the due principal in all or some of these diverse modules and each of them have a separate maturity timings and, hence, also diverse interest charges. For instance, a mortgagor may distribute a sum of $200,000 mortgage into three different fragments. One part of comprising $40,000 may be taken on loan for one year at an interest rate of 2.5 per cent, the second part comprising $60,000 may be due in three years at an yearly interest charge of 3.25 per cent and the third part comprising $100,000 may be taken on credit for a period of five years at an annual interest rate of four per cent. Following this procedure, the borrower does not 'put all his eggs in one basket', but avails the finest of both the worlds. On the one hand, he gets the protection of half of his money (i.e. a fixed rate of four per cent for five years), on the other hand, he is able to put aside funds.

It must be borne in mind that lenders do not offer the multi-term mortgage facility to help out the borrowers. In fact, the lenders too profit from this payment arrangement. According to this system, even in case a borrower wants to change lenders, he cannot do it unless the module matures or without paying a penalty to the lender. However, it is essential to have the lender's consent in the second case; otherwise he will not be able to breach the agreement. Moreover, if the borrower jumps his contract revival further than the last date of maturation of a particular amount, the date of handing over the mortgage to a different lender automatically gets put off. In effect, under this system a borrower is only able to re-finance his mortgage somewhere else when all the modules or fragments mature simultaneously. Consequently, the entire process of 'multiple-rate mortgage' or 'split-level mortgage' is actually whitewashed for the borrower as he does not derive any benefit from the multiple-term bargain. On the other hand, the multi-term mortgage arrangement assures the lender his client's allegiance and maintenance, in any case till the final fragment of payment is mature.

In addition to the above mentioned obstacles, in the instance of 'multiple-rate mortgage' or 'split-level mortgage' there is one more latent problem for the borrower. With each of the fragments maturing at intervals of one to three or four years, the borrower has to renew the agreements time and time again. In such a situation, he will be spending substantial amounts as renewal fees, which was not necessary if he had opted for a long-term mortgage payment arrangement. Hence, much of the money saved by the borrower by opting for a multi-term payment agreement will be spent by him on renewal fees. In fact, it would be much more beneficial if the borrower would have convinced the lender to mention in the mortgage agreement that no renewal money would be charged once each part of the mortgage matures. If he has not done so, he will have to plead with the lender to waive the renewal fees each time any fragment of his mortgage matures and wait for his leniency!

Post-dated cheques / pre-authorized chequing

When you go for mortgage shopping, you will find that most lenders are persistent that they receive the post-dated cheques in advance every year. They also offer a substitute method whereby the lenders may want the borrower to take part in their pre-authorized chequing arrangement. But there is no one who would like the lenders to look into their bank accounts with no signed cheque being issued as this has the potential to lead to several mistake. On the other hand, you will also find some lenders who would be firm on the borrowers maintaining their bank accounts with them to enable the lenders to route the mortgage payments from these accounts. Such demands from the lenders are more common for fast-pay mortgages where the payments are made every week, bi-weekly or twice in a month.

Therefore, before you sign a mortgage commitment or obligation, it is essential that you discover what your prospective lender may require or demand from you. This is important because if you don't fulfill the clauses mentioned in the mortgage agreement after having signed the mortgage commitment, this may tantamount to being a defaulter and lead to a possible recall of the credit.

Joint signatories

In legal terms the joint signatories or co-signers are generally known as guarantors and they provide extra security to a lender for the money he is giving on loan. Especially, when the borrowers are just short of meeting the income necessities, a guarantor is of great help in getting his loan approved. However, if a borrower fails to keep his commitment and defaults, the guarantors or co-signers are obliged to make the full and final payments to the lender. In addition, when they sign the mortgage commitment along with the borrower, the co-signers also concur to fulfill other responsibilities such as completing the insurance of the mortgaged assets.

Although the aspect of having a guarantor may appear to be beneficial, it is actually an indication of the financial weakness of the borrower. There are, however, exceptions to this view, especially when one spouse stands as a guarantor for a loan taken by the other spouse for their conjugal home. Hence, it is advisable not to have a guarantor unless it is extremely required.

Shun interest-only credits

There are a number of lenders who proffer interest-only loans on the pretext that in due course such credits are comparatively inexpensive for the borrowers. However, it is advisable to keep away from such interest-only loans as it has been found that they do more damage than gain to the borrowers.

The disadvantages of acquiring an interest-only credit are many. Interests on these credit financing are not only worked out on a monthly basis, but they are also liable for payment every month. This system is basically beneficial to the lenders as they find it to be the simplest way to calculate and collect the interest. In order to find out how much money needs to be paid in terms of interest every month, divide the agreed interest charges by 12 and multiply the sum by the unpaid principal amount. For instance, if a borrower has taken a mortgage loan worth $200,000 at an agreed monthly interest rate calculated to five per cent and to be paid interest-only every month, his monthly payment will be to the tune of $833.32. It has been seen that the interest worked out monthly actually costs more to the borrowers when compared to the interest calculated semi-yearly or once in six months. In addition, in the payable 'interest-only' arrangement, the borrower is not able to make any payment towards reducing the due principal amount. If you look at the 'interest-only' loans closely, you will find that it calls for double difficulty for the borrowers.

Hence, it is always advisable to shun the interest-only credits like you would avoid a pestilence. Instead of going for the interest-only loans, it is always better to opt for the blended payment mortgage.

Mortgage obligations

As in the case of unnamed bids to make an acquisition, these days lawyers are more frequently being directed to review the draft mortgage commitments or obligations. Reviewing the mortgage commitments make certain that the mortgage application and the mortgage approval express what they are required to say without any concealed zinger or clever remark delivered skillfully. It also ensures that nothing is left out of the mortgage agreement before the borrower signs the contract.

A review of the mortgage commitments is essential these days. While it does not take a lot of time to assess a mortgage obligation, even the cost to the borrower in this regard is the bare minimum. Getting an assessment of the mortgage commitment done is not only money well spent, but also brings peace of mind to the borrower who can now rest assured that there is nothing wrong or against his interest in the agreement. It would definitely be foolish on the part of a borrower to obtain a lawyer's comments on an unsigned $150,000 Agreement of Purchase and Sale and not on the investment of $100,000 of that acquisition value. Actually, under the present circumstances, no borrower can afford to do this as it may prove to be detrimental for him in the long run.

Apprehending that lawyers may be instrumental in breaking a potential deal between them and the borrowers, most lenders are more often than not disinclined to fax or send a mortgage commitment to any legal representative. Interestingly, even the real estate agents are known to express similar apprehensions when a lawyer is asked to assess a draft purchase offer. So, even if your lender discourages you from going to a lawyer to review the mortgage commitment, remain determined and go ahead with your plans. And in case the lenders don't agree with you, feel free to end all transactions with him and take your business to another lender. Remember that any lender who is not willing to get your mortgage commitment being reviewed by a lawyer is playing foul somewhere and he doesn't want this to get exposed by a lawyer. So, he can never be the right person carrying your business with.

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