A Cross-Collateralized Mortgage is a one loan that uses multiple (at least two) properties as collateral for the loan. The mortgage is “cross-collateralized” against multiple properties to provide additional security to compel the lender to make the loan.
The main two benefits of a cross-collateralized mortgage are: 1- the additional security compels the lender to make the loan, 2- Given the additional value multiple properties bring to the table, the borrower may have a lower LTV, thus lower price on the loan. Generally Cross-Collateral Loans are made by private banks or portfolio lenders as there is no secondary market for this type of loan.
A cross collateralized mortgage is essentially a mortgage loan covering 2 different properties that you own. Loan specifics will depend on your lender, and their terms, but here are the basics.
If you owned a property with a substantial amount of equity, and were looking to purchase a new home, you could apply for a cross collateralized mortgage. This would be a loan to purchase the new home, and is typically written in an amount enough to purchase the new home and payoff the existing balance on your current home. You then make 1 payment, paying the single loan that covers both homes.
This is a way to purchase a new home without selling your existing home. That is the primary benefit. Another way to accomplish this is through a bridge loan, which allows you to draw equity from your primary residence to purchase a new property. The major advantage in a cross collateral vs a bridge, is that a bridge will have a short term balloon (6-18 months typically) attached to it, requiring that the bridge loan be paid in full within that time frame. A cross collateral will not have such a clause, and you can keep the loan for the entire term of your agreement.
Cross colateralization means that one ‘account’ can draw from another ‘account’ based on pre set peremeters.
In the mortgage industry I know of a good example we are using right now.
For a construction loan or purchase loan we can use equity in the home you own now, and loan you up to 100% of the value needed (purchase price or construction cost total.) as long as the combined LTV is LESS than 75%.
For example: If you have a home that is worth $500,000 and you owe $100,000 then you have 400K in equity. You are buying a new home for 600,000. Your combined Value is $1,100,000. Your combined debt is $700,000. If you qualify for the payments we will loan you the $600,000 in one loan at conformaing rates and cross collateralize the new home with the existing home.
As long as you own both properties nothing has to happen, but if you sell the existing home later….the lien which is placed on the first property gets paid off, which would have been 20% of the purchase price of the new home ($120,000) which reduces the loan amount on the new house by that amount.
The advantage is that you do not have to sell the original house to get financing for a new home. The drawback is that you have to qualify for both home payments concurrently to use the program.