Five years ago Mike & Jennifer built their own house, in an established neighbourhood.  They were able to convince her mother to co-sign for $60,000 to pay for the lot and the initial costs of the well & septic system, foundation, back fill, etc.  The lending institution, their bank, took a promissory note and a first collateral mortgage on Mom's house for security. Once that amount of money was put into the deal, then another bank  gave them a construction loan to complete the house.   Even though Jennifer's mom co-signed and put up her house for security, the kids were making the payments.

Four years ago, Jennifer had a medical setback.  She was forced to take a much reduced income on a disability plan.  At the onset, their credit was perfect, they had virtually no credit card debt, and the payments on both mortgages (theirs and Mom's) were manageable.  Cashflow soon became an issue.  Mike & Jennifer first made mortgage payments on both houses, then lived on whatever was left over.  Credit cards soon became a source of much needed cash, and their property taxes went into arrears. They now need an additional $20,000.  They approached me for a second mortgage on their house.  The loan-to-value ratio (all mortgages versus value of house) exceeds 75% financing, which means a very high rate of interest.  The payment on this new loan will be $250 per month at 15%. The second mortgage lender will also insist that the property taxes be paid on a monthly basis, and that all their credit cards be cancelled.   All this means that their normal monthly obligations will increase by some $550 (that's $250 for the loan and $300 for taxes), and that they will no longer have the security of credit cards.  Even though Jennifer wants to go back to work soon, they really can't rely on the income going up dramatically until she has tried to go back successfully.  If I am doing my job properly, as their mortgage Broker, I must seek a palatable solution to their problems.  Even though I can get them this second mortgage, if they can't really afford the extra $550 per month at this stage of the game, why spend good money to get access to funds, only to lose the house in the long term?

The secret is Mom!  If we increased the mortgage on Mom's house by the extra $20000, re-amortized that loan over 25 years, then the monthly payments would only go up $143.  Once they get the extra money from Mom's house, they can pay down all the credit card debt, pay up all the back taxes, and pay for taxes until the end of 2000.   Since they no longer have to set aside tax money monthly, and the lender against Mom's house will not insist on credit card facilities being cancelled, this avenue is much more attractive to the kids.  The plan will give Jennifer a few extra months of recuperation before she has to go back to work.  Now the question, will Mom go for it?  Right now, Mom has co-signed on a loan of $60,000, and has offered her house as security for the loan.  She has no security to protect her.  I told the kids to approach Mom on a business level (rather than personal level).  Offer Mom the security of a second mortgage on their house for $80,000 (the original $60,000, plus the additional $20,000).  Since the debt for the original $60,000 is already morally owed, to put it down on paper does not obligate the kids any further, but for Mom, having the debt recognized by the kids, and apparent security allowed by the kids, just re-affirms a business intent, with visible security (a mortgage).  The interest rate for Mom's house is 7.25%.  The processing costs were also less expensive going through this Mom's house, because of the much lower loan-to value ratio.  This way everybody wins!