A new type of affordable 15-year mortgage aimed at moderate-income and flawed credit borrowers is getting a tryout by Bank of America and Citigroup.
Cover Yourself with a Blanket Loan
When the air is frosty and the cold winds blow, most people grab the nearest blanket and cuddle up. It provides comfort when life becomes anything but. In much the same manner, a blanket loan makes financing during a transitional phase an easier process.
The blanket loan is one mortgage secured by more than one parcel of property. The most important characteristic of this type of loan is a "release clause," which allows the borrower to sell off part of the securing property without having to refinance. This differs from a traditional mortgage, which typically requires the borrower to pay the loan balance in full if the securing property is sold.
Residential land developers use blanket loans regularly to fund the purchase of large land tracts. At funding, the loan is secured by 100 percent of the purchased land. Over time, the developer subdivides the property and sells it off in pieces. Upon the sale of each piece, that portion of the security is released, and the developer makes a partial pay down to the loan.
Bridging the gap
Individual buyers sometimes use blanket loans to ease the transition between the sale of an existing home and the purchase or construction of a new one. For most homeowners, this type of financing is a streamlined alternative to carrying two separate mortgages, taking out an expensive short-term loan, or selling early and living in a rental.
The pros and cons
Efficiency and flexibility are the biggest advantages. An individual using a blanket loan would have only one mortgage payment instead of two. A developer can proceed with selling off portions of its investment without continually refinancing the associated debt. In the event of a default, the bank or financial institution can take control of all of the property securing the loan.
When financing multiple properties creates discomfort, reach for a blanket loan for that warm and fuzzy peace of mind.
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