What Is Cross Collateralization and How Does it Work?
With so many ways to finance real estate, investors can choose a strategy that works best with their goals. One strategy that’s useful for existing homeowners is cross-collateralization. This method allows investors to tap into existing equity and fund multiple investment loans at once. However, it’s not viable for everyone. Read along while we discuss how it works and the pros and cons of cross-collateralization.
Contents of This Article:
- What Is Cross Collateralization?
- Benefits and Risks of Cross Collateralization
- Is Cross Collateralization Right for You?
- Fund Your Investment With a Hard Money Loan Today
What Is Cross Collateralization?
Cross collateralization is a unique financing method that allows investors to finance real estate in a few different ways. In one instance, investors can use one property as collateral for multiple loans. Or, they could use multiple properties as collateral for one or more loans.
For instance, if you want to get a second mortgage loan or take out a home equity loan, you may use an existing property to get a new loan. In that case, you’ll have more than one loan secured by the same property. Since both loans are secured by the same property, the real estate would be at risk if the homeowner fell behind on payments, similar to private money financing.
On the other hand, if one property isn’t enough to secure the loan you want, you may need to put up more than one property to add security. One example of this method is a blanket mortgage. In some cases, investors use the same lender to finance more than one real estate deal at a time.
Loans involved in cross-collateralization don’t have to be the same type, and you don’t have to use them for just real estate. For instance, you can use any asset, like a vehicle or home, to secure other types of financing methods, like credit cards. Next, let’s go over some of the benefits and risks of cross-collateralization.
Benefits and Risks of Cross Collateralization
No matter which method you choose to finance your investment, there’ll be some benefits and disadvantages. After all, each process works differently depending on your investment goals, financial status, and loan conditions. So, read along while we review some of the pros and cons of cross-collateralization.
Pros of Cross Collateralization
Some reasons you may consider cross-collateralization include the following:
- Potentially Lower Interest Rates- Compared to conventional investment property mortgage rates, cross-collateralization allows you to get a much lower interest rate. As such, it’s an excellent financing option if you’re looking for a more affordable way to invest in real estate.
- Leverage- Cross collateralization gives investors more leverage by allowing them to use existing equity to buy more real estate. For instance, you can cross-collateralize one mortgage to finance more than one deal at once.
- Suitable for Investors With Bad Credit History- Cross collateralization is helpful if you don’t have an excellent credit history or don’t qualify for a traditional mortgage loan. For instance, lenders may be more willing to approve a loan for real estate if you have enough equity built up in other rental properties.
- Good Tax Benefits- A cross-collateral loan allows you to claim more tax benefits than an investment loan secured by your own funds. For instance, using existing equity to purchase 100% of the property’s value lowers the effective tax applied and increases your cash flow.
Cons of Cross Collateralization
On the other hand, some of the downsides to cross-collateralization can include the following:
- Risk of Foreclosure- With a cross-collateral loan, you must back it up with one or more properties. As a result, you risk losing your investments if you fall behind on payments or file for bankruptcy. Unfortunately, if you default on one loan, you default on them all, resulting in your assets being seized by your lender.
- Difficulty Selling Properties- When you have multiple properties secured by one loan, it can be hard to sell them separately. As a result, you don’t get the same flexibility as investors with separate loans for each property.
- No Access to Equity- When you secure a loan with several properties, you put all your eggs into one basket, which could put you in an unfavorable position. Some properties may drop in value, reducing the overall equity in your portfolio. However, if you have separate investment loans, you could build equity in one property to purchase more real estate.
Is Cross Collateralization Right for You?
While exploring financing methods, it’s important to recognize that cross-collateralization isn’t right for everyone. After all, it comes with some unique risks, which could put you in a tight financial position if you cannot repay your debt. For instance, if you’re unable to repay a loan, the lender can seize your collateralized asset.
However, cross-collateralization has some obvious benefits, as it allows investors to leverage current properties to get funding for new real estate. After all, this financing method allows you to take advantage of low-interest rates and avoid using your own funds to buy a new property. Additionally, you can potentially fund a new investment even if you have a less-than-perfect credit score.
Ultimately, it’s up to you–the investor–to decide if cross-collateralization is right for you. You’ll want to look at your current investments, your financial status, and your investment goals. Then, you can make a more informed decision. Furthermore, you can always speak to a lender to explore your options and see what’s right for you.
Fund Your Investment With a Hard Money Loan Today
If you’re looking for a creative way to fund your next investment, consider using a hard money loan. Hard money loans are unconventional loans that allow investors to get capital quickly without the strict requirements of a traditional mortgage loan. Investors may use hard money loans for several reasons, whether they don’t meet the credit requirements or if they want quick funding for a fix-and-flip project.
So, if you’re looking for a hard money loan, look to Maryland Hard Money Lenders today. Our professional lenders work with all types of investors to help them achieve their goals. Whether you want to fund a rental property, a new construction project, or a fix-and-flip investment, we can fund it for you. Contact Maryland Hard Money Lenders today to fill out a loan application and learn more about our lending services.