Why Buyers Use Blanket Mortgages
Buyers, particularly in the commercial real estate markets, use blanket mortgages for a number of reasons. Lenders make money making loans. If the numbers work and they get enough security, commercial lenders will originate blanket mortgages used in commercial property investments. Perhaps your next investment would be better served using a blanket mortgage.
You Need to Consolidate Properties for a Refinance
An investor might own multiple properties financed at different times and with very different mortgage terms. If rates are low, it could be possible to group properties together for refinancing with a blanket mortgage. In doing so, payments could be lower in aggregate. It could also allow the owner to take out cash to be used for further investment. Particularly if an investor is holding multiple homes bought at different times at different mortgage rates, this can be an option if there is some equity.
For properties held for a while, it may look like this:
- Property A value $165,000, loan balance $125,000 at 6.5%, payment $847/mth
- Property B value $172,000, loan balance $122,000 at 6.75%, payment $809
- Property C value $149,000, loan balance $118,000 at 6.0%, payment $746
- Total value is $468,000, total owed is $365,000, total payments of $2,402
- Equity is approximately 23%, so a loan is possible.
- New blanket mortgage of $365,000 at current 5.0% rate is payment of $1,959
- $443 increase in monthly cash flow
Increase Financing for New Acquisitions
Suppose an investor wants to develop or rehab a commercial property. The amount of cash needed for the purchase and the work is greater than can be borrowed on that property alone. The buyer could provide other properties in a blanket real estate mortgage transaction. Under the right conditions, the buyer could get more than the necessary funds for the new project. As you can see in the previous example, we are working with properties owned for a while or had large down payments. The new loan will need significant equity, especially if taking cash out.
Better Loan Terms
By including other properties in a blanket mortgage, the lender is better protected with extra value as security. This can frequently be used as a tool to negotiate better interest rates or other loan terms. If a lower payment allows for a positive cash flow from rents, this might be the way to go. Suppose expenses have increased, maybe taxes. Using this approach the investor could get back to or near previous cash flow with a blanket mortgage.
Sellers Can Lock in Extra Property in Holding Paper
If selling a property and asked to take on some of the financing, a seller can protect their position better if they can get the buyer to use other property they own as further security for the loan. Perhaps a single family rental home investor with a significant portfolio is trying to move into apartment investment.
A project is found, but the seller must take back some of the financing. They may only do so if the buyer uses some other properties to give the seller increased security. As we can see, there are very sound business reasons for using a blanket real estate mortgage. If some or all of these criteria are present, buyers, sellers, and lenders should consider this alternative.