What Is a Blanket Mortgage?
The term blanket mortgage refers to a single mortgage that covers two or more pieces of real estate. The real estate is held together as collateral on the mortgage, but the individual pieces of the real estate may be sold without retiring the entire mortgage.
Blanket mortgages make it easier to get financing for multiple properties rather than having to take out numerous mortgages.
- A blanket mortgage is a single mortgage that covers two or more pieces of real estate.
- The real estate is held together as collateral, but the individual properties may be sold without retiring the entire mortgage.
- Blanket mortgages are commonly used by developers, real estate investors, and flippers.
- A primary benefit to a blanket mortgage is that it allows the borrower to have more cash on hand—for example, a property owner can save on costs associated with applying for and closing on multiple mortgages.
- Pitfalls to blanket mortgages include higher average costs than a traditional mortgage.
Understanding Blanket Mortgages
A blanket mortgage is a great alternative that can be used to finance the purchase of multiple properties—especially for developers, real estate investors, and flippers. Blanket mortgages, which are also referred to as blanket loans, are typically taken out to cover the costs of purchasing and developing land that borrowers plan to subdivide into individual lots. In many cases, borrowers acquire properties within a large purchase that they intend to sell in individual parts.
For example, flippers may seek blanket mortgages as a way to act quickly and take advantage of opportunities they see in the market. If the investor identifies multiple properties they want to acquire, refurbish, and put back on the market, a blanket mortgage could offer more leeway to make such actions more possible.
The clauses of such a mortgage may make it feasible to resell the properties as new buyers come forward individually. Depending on the terms of the blanket mortgage, it may or may not be necessary to refinance the loan when separate properties are sold.
Businesses with multiple locations they wish to own and operate out of may also seek blanket mortgages. This could apply to real estate developers who invest in commercial or residential property, such as apartment buildings or multifamily homes.
Most blanket mortgages come with a release clause. This clause frees up the borrower from the portion of the loan that's already been paid for. So when the borrower sells a piece of property covered under the loan, they can use these funds to purchase another property.
This is common for developers who develop land and build and sell new homes. Once the homes are sold to the public, the developers can use the money to purchase new plots of land rather than pay down the loan.
Blanket mortgages come with release clauses that allow them to sell properties and use the funds to purchase new ones rather than pay off the loan.
Advantages and Disadvantages of a Blanket Mortgage
One of the primary benefits of taking out a blanket mortgage is that it allows the borrower to have more cash on hand. For instance, a property owner can save on various costs associated with applying for and closing on multiple mortgages. The property owner would only need to pay one set of fees for the blanket mortgage rather than separate fees on each property.
The aggregate blanket mortgage may also take advantage of better interest rates or simply be negotiated to offer more favorable terms than having to pay separately negotiated loans. This could free up more capital if it reduces the size of monthly payments, which in turn could offer them more resources to purchase more property.
But there are also pitfalls to this kind of financing. For instance, the costs tend to be higher than a traditional mortgage. Since the loan amount may be higher—because of the number of properties involved—the lender may require a higher down payment to secure financing.
The terms of the loan also tend to be different from traditional mortgage loans. Lenders may require the borrower to make a balloon payment. That is, they may have to pay off the entire loan within a certain period of time.
If the owner defaults on one property, the impact may not just cover that single property. In fact, it may trigger a situation that allows the lender to seek control of all of the entire set of properties covered by the mortgage.