Priority Agreement Mortgages: A Comprehensive Guide
When it comes to purchasing a property, most people require a mortgage to finance the transaction. There are different types of mortgages available in the market, and each comes with its own set of pros and cons. One type of mortgage that is gaining popularity these days is the priority agreement mortgage.
In this article, we will provide a comprehensive guide on priority agreement mortgages, including what they are, how they work, and their advantages and disadvantages.
What is a Priority Agreement Mortgage (PAM)?
A priority agreement mortgage (PAM) is a type of mortgage that enables the borrower to obtain a percentage of their mortgage amount at a lower interest rate than the remaining balance. The PAM is usually used to fund the initial down payment for the mortgage.
How Does a Priority Agreement Mortgage Work?
A priority agreement mortgage works by dividing the mortgage amount into two portions. The first portion is the “priority” or “senior” mortgage, which covers a specific percentage of the mortgage amount, typically 80%. This portion is secured with the property as collateral and has a lower interest rate than the remaining balance.
The second portion is the “junior” or “subordinate” mortgage, which covers the remaining balance of the mortgage amount. This portion has a higher interest rate and is also secured with the property as collateral.
In the event of default, the priority mortgage holder gets paid first, followed by the junior mortgage holder.
Advantages of Priority Agreement Mortgages
There are several advantages to using a priority agreement mortgage. These include:
1. Lower Interest Rates: The priority mortgage portion of the PAM typically has a lower interest rate than the remainder of the mortgage amount. This means that borrowers can save money in interest charges over the mortgage term.
2. Lower Down Payment: With a priority agreement mortgage, borrowers can obtain a lower down payment, which can be especially helpful for first-time homebuyers who may not have the funds to make a substantial down payment.
3. Faster Mortgage Approval: Since the priority mortgage portion of the PAM is secured with the property as collateral, lenders are more likely to approve the mortgage application quickly.
Disadvantages of Priority Agreement Mortgages
While there are several advantages to using a priority agreement mortgage, there are also some disadvantages to consider. These include:
1. Higher Interest Rates: While the priority mortgage portion of the PAM has a lower interest rate, the subordinate mortgage portion typically has a higher interest rate. This means that the borrower will pay more in interest charges over the mortgage term.
2. Limited Options: Priority agreement mortgages are not offered by all lenders, so borrowers may have limited options when it comes to choosing a lender.
3. Potential Risk: Since the priority mortgage holder gets paid first in the event of default, the junior mortgage holder may face a higher risk of not getting paid in full. This means that the subordinate mortgage holder could potentially lose money in the event of default.
Priority agreement mortgages can be a good option for borrowers who need a lower down payment and want to save money on interest charges. However, there are some potential risks to consider, such as higher interest rates and limited options. As with any financial decision, it is essential to do your research and speak with a financial advisor before deciding if a priority agreement mortgage is right for you.