Cross Collateralization - there is a better way
Does It help or hinder you?
Cross collateralization occurs when the bank uses the security for one loan to secure another loan.
What you want to aim for is to have any property you own, investment or otherwise, financed with free standing finance. |
How Can It Help You
For property investors just starting out, using your home equity can help you get your first investment property most easily. The advantage of using cross collateralization is that you can borrow 100% or more of the price of your next property plus the costs of purchasing (usually about 5% - 6%).
How Can It Hinder You
The biggest disadvantage of crossing your collateralization is that it ties you to one financial institution.
I'm not saying your current bank is a bad bank, they may have served you faithfully and well for many years, but you are embarking on a new business venture here and your current bank may not be able or willing to meet your needs going forward.
Yes you heard me right, every piece of investment real estate you buy is like a new business venture. It works for you producing a cash flow week in week out and will produce long term capital gains profits that are reliable, rock solid and way beyond what you could earn by working or saving.
However cross collateralisation can bring your real estate investment financing plans to a standstill.
For example it is usually mandatory that the properties being cross collateralized be in the same state. If you want to be free of restrictive banks lending rules then use a line of credit to borrow the funds you need instead.
When you are planning to purchase a real estate investment and you approach the bank to get a loan amount pre approval, the bank will usually assume that you are going to cross collateralize your home to purchase the investment property.
Why Should You Avoid It
For most property investors this is not what you want. By asking that the equity you have in your home or other real assets be made available to you as a LINE OF CREDIT you are put in a much more flexible position.
If you are sure that you only want to purchase one investment property, cross collateralizing your home may serve your purpose.
No Money Down property Investment
This is usually achieved by using a cross collateralization. But using the techniques on discussed on the REFINANCEING REAL ESTATE INVESTMENT and HOME EQUITY LINE OF CREDIT pages you can use more advanced techniques to buy investment property with no money down.
Remember, what you are aiming for is to have any property you own, investment or otherwise, financed with free standing finance. This is achieved by making use of a line of credit secured against your home initially. As the value of your property investment portfolio increases you can set up more lines of credit to access the available equity you have in your real estate investment portfolio.
See these related related articles in
Wikipedia and EzineArticles for more information
Return From
Cross Collateralization
To Real Estate Financing Tips
Or go to Freedom Steps With Property Investing
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