Collateral, also called security, consists of assets offered by a borrower in order to derive a loan. In the event of failure to repay the debt, the collateral is confiscated in lieu of the excellent amount. Any item of economic value, especially which could be liquidated or converted to cash can be pledged as collateral.
When collateral for one loan serves as collateral for other loans as well, it is called cross collaterization. The most base example being the case when a man wants to buy a new home when he already owns one house. The asset being cross-collateralized needs to be appraised and indemnified.
How one asset can serve as collateral to dissimilar loans? The intuit is "Loan to Value," or Ltv. This is the relative estimate of the sum loaned against a asset with respect to its value. As for example, a house that is at present priced at 0,000 with 0,000 debt has an Ltv of 50%. That is, the owner has borrowed an estimate which is 50% of the cost of the property. Some or the entire remaining price can be utilized as collateral for a dissimilar mortgage or credit. Cross-collateralization can be used to counterbalance risk factors complex in a financial transaction, that is, to allow the lender to circumvent the possibility of incurring a loss in case of default.
It is mandatory that the location of the asset being cross-collateralized be in the same state as the new asset being acquired. Cross-collaterization is offered on briefcase loans like the choice Arms and the Flex 3 and Flex 5 loans, in which initially the rate of interest and the estimate to be paid remain fixed for 3 years and 5 years respectively.
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Cross Collateralization
