Finance Two Houses with One Blanket Mortgage Loan
With mortgage rates at 4 year lows, refinancing has again become attractive to many homeowners. While none of us knows with certaintly where rates will go in 2009, anyone with an adjustable rate loan or a fixed rate loan with an interest rate at 5.75% or more can take advantage of 5% market rates today and achieve a payback period of around 12-14 months.
Homeowners that also own one or more invesment properties are likely considering refinancing their investment property mortgages in addition to their primary residence. One seemingly promising option is to roll all of the loans into a single blanket mortgage loan (a loan secured by more than one property). The goal: obtain a lower interest rate by borrowing a larger single sum, and simplify monthly payments.
While appealing on the surface, blanket mortgage loans suffer drawbacks for both borrowers and lenders, making them unattractive for most situations. Here’s why:
Blanket Mortgage Drawbacks
- Primary residences and investment properties have different risk levels, leading to a higher blanket loan interest rate. Default rates on primary residences are lower because people view their own home as more important than an investment property. In difficult times, people pay their primary residence mortgages first to avoid losing their homestead. Primary residences also take benefit of additional Government programs that help people stay current on payments in difficult times, and may be backed by Government insurance. Investment properties don’t enjoy as much owner commitment or Government support as primaries. As a result, mortgaging an investment property and a primary residence together will likely lead to a higher overall interest rate on the loan, negating any savings gained by borrowing a larger single sum.
- Selling one of the properties is more difficult. Since both properties are collateral for the blanket mortgage, selling one property necessitates refinancing the other, leading to higher overall selling costs and a potential higher interest rate based on market conditions at the time.
- Defaulting on the loan jeopardizes both properties. Since a blanket mortgage is securitized by both properties, a default on payments puts both of those properties at risk.
Blanket Mortgage Alternatives
Instead of looking for a blanket loan, there are two reasonable alternatives to achieve virtually the same objectives:
- If you have sufficient equity in one of the properties, borrow against only that property and pay off the loan(s) on the other properties. In essence, you are financing all properties with only one loan (or possibly a first and second loan on the same property), but the second and subsequent properties do not serve as collateral for the loan.
- Refinance each loan individually. While there are additional closing costs associated with closing the extra loan, in this case, these costs are well worth it for the protection multiple loan vehicles provides.
When Blanket Mortgage Loans are Appropriate
Blanket mortgage loans are appropriate when there is a sufficiently large and similar asset class that is to be collateral for the loan. The simplest example of this is when a builder borrows money from a bank to build multiple homes in a new subdivision. In this case, the builder may be able to structure a loan that allows him to pay back a portion of the loan each time he sells a property without needing to refinance the loan.
Since most individual properties owners aren’t in this situation, they can’t, and shouldn’t, take advantage of a blanket loan.
Image courtesy of C. W. Cohenour.
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