Cross-collateralization
From Wikipedia, the free encyclopedia
Cross-Collateralization is a term used when the collateral for one loan is also used as collateral in a different loan. One example would be if a person owns a house but wants to buy a second house, that person can use the equity in their existing house as collateral for a loan on the new one.
The reason one property can be collateral in two different loans is related to another real estate term "Loan to Value," or LTV. This is the ratio of the amount borrowed against a property in relation to its value. For instance, a house that is currently valued at $500,000 with $200,000 debt has an LTV of 40%. This means the owner currently has borrowed 40% of the value of the property. Some or all of the remaining value can be used as collateral for another loan. Many lenders will loan up to 80% LTV or higher.
