> Cross-Collateralization


Cross-collateralization uses an asset for collateral on one loan and again on a second loan. In real estate, taking a second mortgage on a property is one form of cross-collateralization. This approach uses the equity accrued on the property as the collateral on the second mortgage. In short, cross-collateralization allows the investor to utilize the equity they have in other properties to secure financing for a new investment without a down payment. 

One example is a homeowner with a mortgage on their principal residence using that same property along with an additional property as collateral on a loan covering both properties. When this type of loan is secured with the homeowner’s current lender, it can reduce the risk of loan default since there are now two properties securing the loan, each with its own risk profile. The borrower already has a relationship with the lender and can leverage that with the additional property, perhaps receiving a more favorable rate and foregoing a down payment. 

The downside for the investor is that if they can’t make the payments on one loan, both properties are at risk of foreclosure by the lender.