Home Equity Loan
A home equity loan is a transaction, under which the obligations of the borrower are kept by the property he has. Instead of real estate, the collateral can be, for example, a car or jewelry.
The terms for such loans are much more profitable than for conventional consumer loans, but the borrower’s risks are much higher. The essence of a secured loan is as follows: the borrower receives a certain amount of money from the bank and undertakes to return it in due time. If the obligations are not fulfilled, then the bank gets the opportunity to sell the property that is pledged to it and thereby pay off the resulting debt.
Another difference over a regular consumer loan is a longer loan period. If the term of an ordinary loan rarely exceeds 5-7 years, then a loan secured by real estate can be obtained for 10-15 years.
This type of lending is perfect in situations when a large amount of money is urgently needed, and the borrower has financial difficulties or it is not possible to officially confirm the income. As a rule, banks are more loyal to borrowers who pledge their property to them, because for financial organizations the risks of non-repayment of debt are reduced to an absolute minimum.
Loan or mortgage: what’s the difference?
Also, a loan secured by real estate is an excellent alternative to mortgage lending. To begin with, we suggest that you understand the difference between these two terms and learn about their fundamental differences. We have already figured out what a real estate loan means, we are talking about a mortgage.
A mortgage is a targeted loan that banks provide to borrowers to buy a home. It is secured by default on the property. That is, if the borrower cannot cope with the financial burden, then the apartment will be sold at auction and the proceeds will cover part of the debt. It is more difficult to issue a mortgage loan, since there are always certain requirements for borrowers and their status – age, work experience. There are situations when banks refuse to issue a loan and then the borrower has no choice but to try to get approval for a consumer loan, which, as you know, has a high interest rate.
Significant advantages of a mortgage over a real equity loan is the opportunity to participate in various programs that allow you to make the interest rate even lower.
Under what terms do banks issue a loan?
It is no secret that the majority of banks impose rather stringent requirements on borrowers. This is especially true for mortgage lending. In addition to the requirements in relation to the age, income level and social status of the borrower, a prerequisite for obtaining a mortgage is the presence of a down payment. Not everyone has the opportunity to deposit it, and just a loan secured by real estate is an excellent way to improve their living conditions – to mortgage an old apartment and pay off a loan for a new one, without a down payment.
The requirements for a loan secured by real estate can be called quite gentle:
- Borrower age – from 21 to 75 years;
- Citizenship of the United States;
- Availability of an object for collateral.
It is important that the apartment does not have to be the collateral object. It can be a house, a country house, a land plot, or a commercial property. The main requirements of banks in relation to mortgaged real estate are:
- lack of encumbrances;
- liquidity – the ability to quickly sell an object if such a need arises due to the borrower’s insolvency.
What is also very important to consider is the assessment of the object. As practice shows, banks offer loans 25-30% lower than the market value of the object. That is, if you want to apply for a home eqiuty loan, the market value of which is $100,000, then the loan amount will be approximately $70,000.
By the way, the bank is unlikely to approve a loan secured by real estate, which will be difficult to sell. This category of objects includes an old fund or houses that are in an objectively poor condition and require great investments in repairs.
We figured out how to take out a loan secured by real estate. However, before you transfer your property as collateral, you need to take into account several nuances:
- throughout the time when the apartment is pledged, you cannot make any transactions with the object – sell, donate, inherit;
- the pledged apartment cannot be rented out. This is especially true for cases when the borrower wants to receive income from the delivery and cover their loan debt;
- any real estate object can act as collateral – an apartment, house, office, cottage, land plot or even a garage. The main thing is liquidity and the absence of encumbrances.
A loan secured by real estate is a really great way to buy an apartment if you cannot get a mortgage or you urgently need money. The most important rule is to calculate your strength and avoid delays in payment.