LEVERAGING YOUR CABIN AS COLLATERAL
It all depends on your debt.
We had a question from a client recently regarding whether they could use their cabin as collateral – could they do it? Like most answers in the mortgage world, the answer is maybe. It really depends on what other debts are being carried and what the cabin is being utilized as collateral for.
There are two basic ways to draw cash out of piece of property, which is usually what people need to do when they say they want to use something as collateral. 1) For obtaining a secured line of credit; or 2) For obtaining a mortgage, providing the property qualifies.
If all you’re looking for is a bit of cash flow then a line of credit secured against the cabin can be a great choice.
A secured line of credit can be up to 65% of the value of the property so if the property is title clear, you’d have plenty of room to draw cash out as needed.
This is a great option if you need money for renovations for instance because you can pull money out as needed without over borrowing.
Secured lines of credit also tend to be lower interest than unsecured as the risk is balanced by the value of the property.
Another option for using your cabin as collateral is to mortgage it. The advantage to this approach is that the overall interest rate will be lower than with a line of credit but you receive a lump of cash.
If you want cash for something like renovations then this means you’re going to need to estimate how much you need and then make it work.
If you’re planning to buy another property and are using the cash for the down payment, it’s easier to know how much you’ll need. In that situation, a mortgage is probably the better choice.
Some lenders may not place a line of credit or a mortgage on a cabin or recreational property, depending on their lending guidelines. Your mortgage broker would be able to investigate these opportunities for you.
It’s important to keep in mind that if you’re buying a new property and will need a mortgage on that place, then you’ll have to qualify while carrying both the mortgage or line of credit on the cabin, as well as the mortgage on the new property.
Talk with your mortgage broker about your plans. He or she can check the qualifying details for you and make sure you get the best combination of financing to help you get where you want to go.