Can my house be used as collateral for multiple loans?

A home is not only a place you live but can also provide an inexpensive way to borrow money. Whether you’re looking to pay for a home remodel, college tuition, debt consolidation, or something else, your home’s equity can be a source of cash. 

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If you have an existing loan on your home, you may be asking, “Can my house be used as collateral for multiple loans?” The simple answer is yes, through a cross-collateralization clause on your loans. Learn what cross-collateralization is, how it works, what financing options are available, and alternatives to consider.

How cross-collateralization works

A cross-collateralization agreement is a finance term for securing multiple loans against the same asset instead of getting a single loan against multiple properties. If you have an existing mortgage, this means getting a second (or third) loan that is secured by your home without having to replace your current loan. Here’s how the process works for most homeowners:

• There is an existing mortgage on the home. 
• The homeowner applies for secondary mortgage financing (HELOC, home equity loan, SBA loan, etc).
• The new loan is subordinate to the primary mortgage.

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The new loan is “subordinate” to the existing loan, which means that it is in second position behind the primary mortgage. In case of a borrower defaults, the primary loan is repaid first from the sale proceeds. The subordinate loan is paid out of what is left from the sale of the home. In many cases, the sale proceeds are not enough to pay some or all of the subordinate mortgage. Due to the higher risk of not being repaid, subordinate loans typically have higher rates and shorter repayment periods than a primary mortgage.

Reasons to take out a second loan

Borrowers use cross-collateralized loans for a variety of reasons, depending on their financial needs and preferred loan terms. These are a few of the most common reasons to take out a second mortgage on your home.

• Keep existing mortgage. Many homeowners locked in fixed-rate mortgages at rates much lower than what’s available today. With that in mind, they turn to cross-collateralized loans that allow them to tap into their equity without having to give up their current mortgage.
• Lower monthly payments. HELOCs allow borrowers to make interest-only payments during the draw period, which keeps their payments lower than a traditional loan.
• Uncertain borrowing needs. If you’re unsure how much money you’ll ultimately need, a HELOC provides flexibility to withdraw and repay money as needed. You also avoid paying interest on money you’re not using.
• Short-term borrowing. Taking out a second loan allows borrowers to select a shorter term than a traditional 30-year mortgage based on how the loan’s payments fit into their budget.
• Lower closing costs. Refinancing a real estate loan often comes with high closing costs that negate savings on interest rates. Many secondary financing options have low or no costs associated with them.

Can my house be used as collateral for multiple loans? Common examples of cross-collateralization

Here are a few examples of the types of subordinate loans available to homeowners.

• Secondary purchase mortgage. When you have less than a 20% down payment, some borrowers avoid private mortgage insurance (PMI) by taking out an 80% first mortgage and a smaller secondary mortgage. This helps to fit within a lender's loan to value ratio (LTV) requirements to qualify for the best interest rates and loan terms.
• Home equity line of credit (HELOC). A secondary option that provides flexibility through a line of credit where you can draw and repay money for a specific period of time (usually 10 years). Throughout the draw period, borrowers have interest-only payments based on their monthly balance and a variable interest rate. When the draw period expires, the balance converts into an amortizing loan.
• Home equity loan. A loan that provides a lump sum of cash with a fixed interest rate that does not change throughout the loan period. The loan has a fixed monthly payment and a specific repayment term. If you need more money, you’ll need to take out an additional loan or replace it with a larger loan.
• SBA loans. Small business owners may take out an SBA loan that is secured by the equity in their homes. These loans are subordinate to existing mortgages on your home.

Pros and cons of cons of cross-collateralization

When considering multiple loans on your home, you must consider the benefits and risks of cross-collateralization.

Pros

• Don’t have to give up your current mortgage
• Often have lower origination costs than refinancing
• Flexible loan options to meet a borrower’s needs

Cons

• Multiple loans may be harder to track
• Tapping into your equity can put your home at risk
• May receive less appealing rates and loan terms

Alternatives to consider

While a cross-collateralization loan is an excellent choice for many homeowners, they aren’t the best choice for every situation. Before submitting your application for one of the loan options above, consider these alternatives that may be a better fit.

• Cash-out refinance. Homeowners often refinance their existing loans to pull cash from their home’s equity by getting larger loans against their properties. A new mortgage spreads out repayment over a longer period and locks in a lower rate than most subordinate loans.
• Home equity investment (HEI). This financing options allows homeowners to tap their home’s equity without adding another monthly payment to their bills. HEIs do not require proof of income and they typically have lower credit requirements than a HELOC, refinance, or other traditional mortgage products. Like other home equity products, an HEI takes a subordinate position to a first mortgage .
• Personal loan. A personal loan is financing that is unsecured (not backed by an asset). Unsecured personal loans are based on your income and credit history. Secured loans require that an asset serves as collateral before issuing the loan.
• Credit card. Credit cards typically have high interest rates, but a new credit card with a 0% intro APR offer can provide interest-free financing on purchases or balance transfers. These promotions typically last less than two years, so they are not a good choice if you cannot pay off the balance before the intro rate expires.

Frequently asked questions

Can my house be used as collateral for multiple loans?

Yes, it is possible to use your home to secure multiple loans. The first loan is the primary loan, and each subsequent loan is subordinate to the previous one. For example, a homeowner may purchase a home with a primary mortgage, then, as the home increases in value, withdraw cash from their equity through a HELOC, home equity loan, or home equity investment.

How much can I borrow using my home as collateral?

The maximum loan amount you can get depends on your home’s value and the lender’s criteria. Conventional mortgages may go up to 95% or 97% with PMI, while niche loan programs through the VA or USDA may go up to 100%. With a secondary mortgage, like a HELOC or HEI, lenders may allow you to borrow up to 80% or 90% of your home’s appraised value.

Why is cross-collateralization risky?

Cross collateralization is risky because you are tapping a greater share of your home’s equity and potentially paying a higher interest rate on the second loan. Juggling multiple loans increases the chance of missing a payment, getting in over your head with debt, or even defaulting on an obligation.

Final thoughts

So, can my house be used as collateral for multiple loans? The answer is yes. It is common for homeowners to use their homes to obtain multiple loans to meet their financial needs. Through a cross-collateralization agreement, a homeowner may tap their home's equity through a HELOC, home equity loan, home equity investment, or another loan. While there are risks associated with adding too much debt to your home, home equity products can provide low-cost financing for home improvements, college tuition, and more.

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