A collateral mortgage is a loan that uses a piece of real estate to secure funds. The borrower and lender execute a promissory note for the amount of the loan.
A collateral mortgage requires collateral or a property valued high enough to cover the promissory note or notes. The note specifies the interest to be paid and the payment schedule.
Collateral mortgages are like a line of credit that the borrower can use in the future. He secures the collateral mortgages for a specified amount. Then, promissory notes can be issued for amounts equal to or larger than the loan amount secured. The only thing owed is the amount on the promissory notes.
Unlike a home equity loan or second mortgage, collateral loans are made on property that has no liens. In addition, the borrower does not have to use the entire amount of the collateral mortgage.
Collateral mortgages are considered a form of a conventional mortgage, according to the Concise Encyclopedia of Real Estate Business Terms.
A collateral mortgage can be used for things like remodeling or investments.