How does a substitution of collateral work?
Works like this. Let’s say that you use a private lender’s funds to cover the costs of paying for a house that you’ll hold title to. The lenders funds are secure against the house via a mortgage on it with terms that are favorable to you. For this example, assume the terms are $50,000 30 years, 5% apr, no payments, with a 10 year balloon and a provision that states that the collateral is replaceable.
For most people that would be a great deal, one that you wouldn’t want to let go away just because you sold the house before the loan is due. That being the case, if you were to sell the house in 5 years, you would still want to be able to use those terms for the remainder of the term of the note. So once the house is sold you can reuse those funds without giving them back to the lender by securing the payoff on another house that you want to buy, sustituting your collateral, and continuing to use those same financing terms for the remainder of the term of the original note.