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Cross-collateralization limits your financial flexibility because multiple loans the bank holds are dependent on one another. If you sell one property, the bank can require the proceeds to be directed toward paying down the balance on other loans within your portfolio, meaning you can lose the ability to spend your proceeds as you desire. When properties within your portfolio are interlinked due to cross-collateralization, the financial institution managing your loans may require that each property in your portfolio be reappraised every time a property is released. There can be significant fees associated with estimating the value of each property and this can become a costly process.
Investors generally prefer to take out interest-only loans, but as their debt grows with a particular lender, they may be offered only principal and interest loans for future expenditures.
Having cross-collateralized loans can make moving your business to another lender difficult and expensive. Loans that are guaranteed by multiple properties generally incur higher establishment fees. An investor who moves cross- collateralized properties from one lender to another may face substantial exit fees. Cross-collateralization means your loans (and properties) are in one shared portfolio. This also means that if one property goes up in value while the others decrease in value, you may see no net gain on your investments. The investor is unable to access the capital realized by the one property because the portfolio saw no overall increase in equity. Again, this could put the investor in a position where they have no access to ready cash when faced with promising investment opportunities.
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