If you’re a high risk home owner with a lot of debt it can be very tempting to try and leverage the equity in your home in an attempt to alleviate some of the mounting debt pressure. You may want to stay in your home at any cost, and you’re willing to try anything. Perhaps you’re in this situation because your high debt load forced you into a bankruptcy or consumer proposal which has destroyed your credit rating. If this describes you it’s likely that you have virtually no chance of getting a second mortgage through traditional channels. That leaves only one option – private lenders.
Reasons to Consider a Private Lender
There’s really only one main reason to consider seeking a mortgage from a private lender – you’re desperate and willing to do just about anything to save your home. That may sound harsh, but it’s the cold hard truth. Getting a mortgage from a private lender is not a long term solution in any way, shape, or form. If you think you’ve been dealt with unfairly by debt collectors and you just need a little time to get back on your feet, this may be a short term solution. If you know that you’re likely to have access to enough money to pay off the private mortgage in full in a years’ time then this may very well be a viable option for you – otherwise you should steer clear of private mortgage lenders.
Reasons to Avoid a Mortgage from a Private Lender
What’s the biggest reason to avoid a mortgage from a private lender? The interest rates are outrageous. Be prepared to pay anywhere from 15 to 30 percent interest depending upon your situation. This means the monthly payments will be much higher as well, and almost all of it will be interest. Let’s say you take out a second mortgage from a bank for around $50,000, you might expect to make monthly payments of about $400. That same amount with a private lender could result in monthly payments of $850. That’s more than double!
It’s also important to keep in mind that these mortgages are normally only offered for a one or two year term, if you don’t have another option after that you may very well lose your house anyway. It doesn’t matter whether you’ve made all of your payments on time or not. If after the end of the mortgages term you do not have the ability to pay it back in full, the lenders representatives will usually attempt to foreclose on your home.
The other thing to keep in mind with private lenders is that there are steep penalties for late payments, and there’s bound to be a lot of fine print that can leave you on the hook for thousands of dollars in extra fees. These investors are in it to make a quick profit – they’re not doing it out of the goodness of their heart in most cases. Almost all homeowners that go the route of private mortgages wind up disappointed and deeper in debt than when they started.
Unless you are seeking a private mortgage as a short term solution, and you’ll have the ability to pay it back within a year, you should avoid it at all costs. The interest rates are extreme, they often include draconian penalties for late payment, and they often result in foreclosure. If you’re in a situation where you think you’re only choice is a private mortgage lender it’s not – sell your home and rent for a couple of years while you get back on your feet. Don’t burden yourself with more debt troubles.