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A blanket mortgage is a loan used to finance the purchase of two or more pieces of real estate. The distinguishing feature of the blanket mortgage is the “partial release clause." The clause differentiates the blanket mortgage from the traditional mortgage because it gives the borrower the flexibility to make a partial repayment of the loan when a piece of the secured property is sold. A traditional mortgage generally contains a “due on sale clause” and requires payment in full when the secured property is sold.
The blanket mortgage is generally considered a tool for commercial purposes; however, there are several circumstances in which different types of borrowers might find a blanket mortgage to be a practical tool for financing. For example, a home buyer who is building a new home might use a blanket mortgage to access the equity in his existing home to help fund the construction of the new home. By using a blanket mortgage to cover the equity in the existing property and the new property, the borrower can use the funds from a blanket mortgage to start building before actually selling the present home.
Real estate investors, who may own several properties financed at different times with different rates, can use the blanket mortgage to consolidate loans. This type of refinance works particularly well when interest rates are low because it provides the borrower with more favorable terms. Another advantage is that by consolidating the loans, the new single payment might be lower than the combination of different individual mortgages, allowing the investor to increase cash flow.
The blanket mortgage is also used by developers who require some flexibility: these borrowers buy large expanses of land which will be subdivided and sold separately at different times in the future, as the development progresses. This allows developers to purchase all the property with one loan, and as each smaller parcel is sold, that portion of the blanket mortgage is discharged.
Builders who are working on several projects also use blanket mortgages. The blanket mortgage can be used to finance several properties at once. As each individual project is sold, that portion of the blanket mortgage is repaid.
Another benefit for borrowers using blanket mortgages is that they may be able to negotiate better terms for the loan. Because they are securing the loan with multiple properties, some lenders can offer better rates and terms thanks to the extra security.
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