We are considering paying off our mortgage. I have an outstanding business loan secured against the house, which we are disputing. What happens if we pay off the mortgage?

It seems that you have two mortgages against your home. You must have a mortgage with a residential lender and have a business loan with a commercial lender that has a mortgage on your home. If you pay off your home loan, you will still have the business loan and its lien on your home.

Keep in mind that while you say that you are disputing the business loan, if you lose that dispute, you could lose your home. You might want to determine exactly how the business loan is secured against the home and figure out what the dispute is with the lender before you use your money to pay down or pay off your mortgage.

People get into trouble when they use their home as collateral for business loans. Some people don’t realize that using a home as collateral for a business loan gives the lender the right to foreclose on the home if the borrower fails to pay off the business loan. Even more painful is that business lenders may have loan covenants that allow them to call the loan due and force the repayment of the loan even if the borrower has made all the payments required under the loan and has not been late in making those payments.

One example of this lender covenant is that the business makes a certain amount of money or keeps a certain amount of cash on hand or that certain business contracts be in place during the term of the loan. If any of these covenants are not upheld, the lender can feel itself insecure and decide to cancel the loan. The business owner will then have to run out and find a different lender to give them replacement financing. If the business owner can’t repay the loan, the lender can proceed to use its remedies under the loan documents.


One remedy in the loan documents is to force the business owner to use his or her personal money to pay off the loan. When the business owner can’t or refuses to repay the loan, the lender can file foreclosure proceedings against the home and can sue the business owner for repayment of the loan. Both situations can be terrible for the homeowner. Losing the litigation on the business side can destroy the business, and on the home side it could mean the loss of the home.

Given the precarious nature you might be in, it might be wise to keep the cash in hand and figure out where everything is going.

Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to Be Wildly Successful in Real Estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.