Why real estate investors should consider a comprehensive mortgage
A mortgage for residential owners
New to the term “global mortgage”? Do not worry. Many professionals in the financial sector have never been close to one. And they know a little more about them than you do.
But if you invest in real estate – perhaps as a homeowner – you might find a comprehensive mortgage (aka “global loan”) very useful for your business. Here’s what you need to know.
Check out today’s mortgage rates. Start here (July 4, 2021)
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What is a comprehensive mortgage?
A comprehensive mortgage is a type of loan that finances multiple assets at once.
Businesses often use global loans to purchase commercial real estate investments. But this type of loan can also be useful for:
- Business owners
- Residential owners
- Real estate developers or pinball machines
- Construction companies
A key feature of comprehensive mortgages is the absence of a “payable on sale” clause. This means that the global loan will survive the sale of one or more of the rental properties by which it is secured.
The owner must repay (“withdraw”) the portion of the mortgage that the property sold. But they don’t have to refinance the entire loan.
Indeed, you may be able to negotiate a mortgage that will allow you to sell, buy or replace the properties in your real estate portfolio with a minimum of hassle and expense.
Benefits of global loans
Having a “partial release clause” rather than a “due on sale” clause makes general mortgages particularly useful for real estate developers and investors.
As a developer, you can use a global loan to buy plots of land and build houses on them. Then, as you sell each individual property, you only pay off the portion of the mortgage that funded the unit you sold.
This means that you don’t have to manage many individual mortgages or refinance the entire overall mortgage every time you sell real estate.
The same benefit applies to residential owners. You can own 12 rental properties and spread their financing over one or two mortgages.
Here are some of the other benefits that a comprehensive mortgage can offer:
A global loan means a lot less paperwork. It allows you to apply for multiple mortgages with a single credit approval. This means you won’t have to submit a credit, employment or asset check multiple times.
Plus, instead of making a lot of mortgage payments per month, you’d only make one or two.
And buying and selling units could be possible with only minor adjustments to your existing comprehensive mortgage.
Save on closing costs
But that’s not all. Imagine the savings you would realize on closing costs, both for the initial mortgages and each time you refinance the loan.
Refinancing multiple loans into one comprehensive mortgage could also save you money on monthly payments, which could increase your cash flow. Although your savings depend on the interest rates you are currently paying and the new rate you have available.
Combining all the stocks you have in your portfolio can help you grow your business. Because it could allow you to maximize the amount you receive in one refinancing of collection.
Better yet, you would pay the closing costs on a single withdrawal refi transaction.
Easier to expand your portfolio
Many private real estate investors end up encountering a common hurdle: They are only entitled to a limited number of mortgages at a time. This ceiling can be a real obstacle to expansion.
Of course, there are workarounds. More often than not, owners create separate companies so that each company has a small number of mortgage loans.
But a comprehensive mortgage negates that need because it allows you to own many homes with fewer loans.
Potentially better loan terms
Imagine someone who has 12 traditional mortgages with an average amount of $ 200,000. For every mortgage lender, it’s a homeowner with a loan of $ 200,000. They will hardly stand out from the crowd.
Someone with a global mortgage of $ 2,400,000 owes the same amount. But they can receive VIP treatment.
And they can use their senior status to take advantage of preferential loan terms and negotiate their own personalized deal.
Again, lower borrowing costs can increase your cash flow from your real estate investment properties each month.
Disadvantages of global loans
As with most things in life, with every benefit there is a downside. Here are some drawbacks associated with a comprehensive mortgage.
Not all lenders offer them
One of the main disadvantages of a comprehensive mortgage is that it is not widely available.
It’s easy to find competitive deals on traditional mortgages. But it can be much more difficult to find a good deal on a comprehensive mortgage.
For starters, many lenders don’t offer them. So you have to find the ones that do. Check with banks that offer business loans for beginners.
You should explore your options with portfolio lenders (who generally view mortgages as their own long-term investments) as well as with traditional and commercial banks.
More difficult to qualify for the loan
You should also expect a closer look at yourself, your financial portfolio, and your business plans when you apply for a global loan. After all, the mortgage lender puts a lot of their money on the line.
Compared to qualifying for a single mortgage, you will need a higher credit score and a larger down payment.
If you are refinancing multiple mortgages into one global loan, expect to need a lower loan-to-value ratio, which means you should have enough equity in the properties you plan to refinance.
Appraisal fees, title searches and other closing costs could also be higher than a single mortgage.
Refusals are frequent. But don’t be discouraged. Seasoned homeowners sometimes expect to be turned down and are happy to keep looking for the perfect lender.
Shorter terms, but not always
It may be possible to find a global loan with a term of 30 years. But it’s not easy. You are more likely to end up with one that lasts 10 or 15 years.
However, don’t immediately move on if those short-term amortization schedules are too steep for you. Sometimes you can negotiate a final lump sum payment that keeps your monthly payments affordable. Just make sure you refinance or sell on time!
No more risk accumulated in one loan
A comprehensive mortgage puts all your eggs in one basket. It is much riskier than a traditional home loan.
If your business is in trouble, you won’t default on one or two small mortgages. You could face foreclosure of all rental units from your comprehensive mortgage at the same time.
Some homeowners have multiple global loans, thus spreading this risk. But it only works if you have a large wallet. The larger these mortgages, the greater the benefits they tend to offer.
Other information on global loans
Each comprehensive mortgage tends to be tailor-made. So the quality of the deal you get will depend on the strength of your finances and business plan, as well as your negotiating skills.
General mortgage loans are generally not available for loan amounts less than $ 100,000 or greater than $ 50 million.
Depending on your financial health and that of your business, you will generally agree with a loan-to-value ratio (LTV) of 50-75%. For purchase loans, that means you will need a 25-50% down payment.
You’ll also need significant cash reserves to qualify, usually enough to cover six months of mortgage payments.
Interest rates vary wildly based on these same financial considerations.
The strongest borrowers with the best credit scores can approach current mortgage rates for a global loan. But the less creditworthy who qualify might pay 10% or more.
So what’s the verdict on comprehensive mortgages?
Obviously, general mortgages will only benefit a minority of homeowners. Most will likely be better off with their existing funding.
But some might find the benefits of a global loan very valuable. If you have a large portfolio, a strong business, and a lot of entrepreneurial spirit, this type of loan might be worth exploring further.
What are the mortgage rates today for homeowners?
Mortgage rates today are near their historic lows. Of course, general loan rates can be much higher than standard mortgage rates. But if you have great credit, lots of cash, and you’re willing to shop, you might find a good deal.
Check your new rate (Jul 4, 2021)