Cross-collateralized Mortgage - good, bad, ugly?

Orange-catzNovember 7, 2013

OK I'm not sure of how much of my saga to write down here - I'll just say I wasn't planning on looking for a house just yet, but one has presented itself that's simply ideal in terms of size, condition, architectural design, location. And price - not sure why it hasn't sold yet, but the longer its on the market the more the price keeps going down (about 6 months now). I've been told that 720 sf is too small for most people (it's great for me), and also Nov-Dec.not a lot of traffic so conceivably I could get a good deal.

On the other hand - long story short, my financial situation is such that at the moment I'm about $20,000 shy of being able to afford it via a conventional mortgage or conventional equity loan. So close, and yet so far!

After talking to 3 lenders I was all set just to give up and just keep plugging away on completing some of the work on my two flat (I live in the upstairs apt. and rent out the downstairs) and get it ready for eventually selling or moving out and renting out both units..

Then I happened to talk to lender # 4, who said, yes sure we can make it happen now - via cross collateralized mortgage - lien is placed on both my old (current) house and the new one. Because I own my 2 flat free and clear I would be able to purchase the new place and use the rental income renting both units to cover loan payments Then I would rent out or sell off my old bldg. when I was ready and go live in the little house,

Unfortunately this lender is on vacation so won't be able to meet with him til next Monday. In the meantime, google isn't turning up much. Does anyone have any real-world experience - are these comparable to regular mortgages in terms of interest rates, closing costs, monthly payments/ amortization etc.

Secondly - who specifically can advise me on the whole realm of investment real estate - what type of professional or specialist am I looking for? Could use some objective advice in deciding whether to go for the cross-collaterized loan ... or not. Is the lender going to give me objective information advice or is he selling a product?

And - is it worth it to hold on to my rental property after I get the little house, or do I want to sell it off? Questions like that. Is that in the realm of the real estate agent or broker - or cpa - or what?

Obviously I'm a little outside of my element here! I did not grow up in a wealthy or investment-oriented family so there's a lot I just don't know, and don't have anyone to ask. This whole concept of using my equity/wealth, leveraging it to obtain more property - is rather an alien concept for me!

I don't think I'll ever want to be a big time real estate investor, just want to be sure any decisions I make re: my modest property holdings are made with good information!


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Why can't you just refinance the house that you own free and clear and use that money to buy the other house for cash?

    Bookmark   November 7, 2013 at 8:07PM
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What otter said would be a safer route for you.
If you did that, and got into financial trouble, you'll just sell off one (or let one go back to the bank) but you'd still have the other to live in.
With the cross-collateral loan, if you got into trouble, you could lose both.

    Bookmark   November 8, 2013 at 1:34AM
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Hmmm. I'm not understanding what you mean by refinancing a house that's already paid off - there's no loan to be "refinanced."

I did look into the equity line of credit, which does exactly what you're suggesting, but borrowing the maximum amount (which is a percentage of home's value) doesn't get me there.

If I was working, that + rental income would get me a bigger loan. However my situation is I'm "temporarily retired" to take time for some family matters and won't be back to work until Jan-Feb.

As I understand it this cross collateralization is a mechanism more commonly used by commercial lenders/ real estate investors and allows lenders to make larger loans at less risk to them. But more risk for me apparently - whether it's worth it, I'm trying to figure that out.

I've already accepted that my timing just might be horribly off and I might not get it - that's life - but I thought hey I really want to give it my all and see if it could work.

    Bookmark   November 8, 2013 at 9:31AM
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Technically your not refinancing your house but taking a first mortgage out on it and using that money to pay for your second house with cash.

    Bookmark   November 8, 2013 at 11:09AM
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I think we'd need to know the relative values of the properties to know for sure that e.g. 70% of current property would allow you to buy the new property. But assuming that works, then I agree with otterkill - no point in putting two properties at risk when one will do.

    Bookmark   November 8, 2013 at 2:00PM
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