Shelter is one of the items at the top of the hierarchy of human needs and that is why people save to get a home they can call theirs. Seeing how important a home is, no sensible homeowner would place that property in harm’s way. Sadly however, some people have lost their home due to carelessness but on the flipside, a house is an asset that can be leveraged to the owner’s advantage.
One of the ways that a homeowner can leverage their home is by using it as collateral for loans. If you own your home, you can use it as security to get a loan. However, you need to understand all that it entails before you put up your property as security for loan.
In this article, we provide a comprehensive guide that will help you make the right decision in this regard. We will explore the benefits of using real estate as collateral and factors to consider before doing so.
What Does it Mean to Use Your Home as Security for a Loan?
A loan secured by real estate is one in which the borrower pledges their home or property as collateral for the loan. This means that the property can be repossessed by the bank or lender to offset the debt in the event that the borrower defaults in repaying the loan. In this case, the borrower is considered a low risk customer and stands a better chance of their application being approved than a person that comes without collateral.
Secured loans especially those with real estate as the security usually come with lower interest rates. This is because as we said it’s a lower risk venture than unsecured loans. Bearing in mind that your home can be repossessed in the event of default, you need to consider carefully before applying for this kind of credit.
It is important to note that you cannot borrow more than 85%of the current value of the house you want to put up as the collateral. This therefore means that a home that is fully mortgaged cannot be used for collateral. However, real estate value is not static and can change from time to time. So if you haven’t had your home valued for a while, you can request for fresh valuation to find out the current value.
Additionally, if you have just renovated your home or made significant changes to it, you need to get a new valuation. Click here to read more about real estate valuation.
Benefits of Using your Home as Security for Loan
There are quite a number of benefits that can be derived from using your home as collateral to get loans. Some of these benefits are listed and discussed below:-
Access to Lump Sum Credit
One major reason why people put up their homes as collateral for loans is because it almost automatically guarantees that they have access to large sum of money. Based on the equity on the home, the homeowner can apply for and get approved for a lump sum of money. The equity in a home is the difference between the current market price of a home and the outstanding mortgage.
This therefore means that the larger the equity you have in your home, the higher the amount of money you have access to. This is a very huge benefit because the borrower can carry out significant projects such as home improvements /renovations.
Predictable Payments Due to Fixed Interest Rates
The interest rates of this type of loan are usually fixed interest rate. This means that the borrower’s monthly payment remains the same all through the loan term. This gives you the benefit of effective budgeting and planning on how to meet your monthly obligations.
With fixed interest rate, you have predictability and stability. In addition, you are protected from any increase in interest rate at any point in the repayment period.
Tax Deductible Interest
In most cases, the interest paid on a loan with housing as security is tax deductible which makes it attractive for homeowners. You can claim tax deduction for the interest paid on your loan. However, we recommend that you consult a tax expert for more clarity on this benefit and how you can make the most of it.
Debt Consolidation
Using your home as security can help you get a lump sum that can pay off smaller high interest debts which may include consumer loans or credit card debts. With a single loan, you can streamline your strategy for the repayment of your debts with just one monthly payment. Additionally, you can get to save some money on interest paid at the end of the day.
Lower Interest Rates
This is actually one of the greatest benefits of using your home as security. Due to the fact that you are considered a low risk customer by the lender, they are more amenable to giving you lower interest rates and better terms and conditions. The equity in your home covers any risks to the lender so they can afford to lower your overall cost of borrowing.
Faster Approval and Disbursement of Funds
Loans backed by real estate as collateral usually get approved faster than other types of loans. This is due to the security provided by the property.
How to Find the Best Loan with Your Home as Collateral
Having seen the benefits of using your home as collateral for a loan, you may be tempted to rush off and go apply for a loan. Please don’t! It is important that you consider the implications of putting up your home as security. The greatest risk is that your home may be repossessed if you default.
Therefore to avoid going from frying pan to fire in your finances, take out time to do your due diligence. We recommend that you go to the website of a reputable lender to find out all that such a loan entails. If after your perusal of the website, you still do not fully understand the requirements or implication of the transaction, please consult a financial advisor.
If you have determined that taking out the loan is the way to go, then you need to go about it in a way that will ensure that you get the best deal. Find below tips for getting the best loan with your house as security:-
Check out as Many Options as Possible
When looking to get the best deal on a loan, ensure that you check out as many options as possible. Visit as many banks and lenders as you can whether online or on- site and find out what their terms and conditions are.
Carry out Comparison Shopping
The reason why you visit or check out as many options as possible is so that you can compare the total cost of taking out a loan with any of them. Bear in mind that you must use the same parameters for your comparison. One very important parameter to use is the effective interest rate; make sure that is what you use for your comparison and not just nominal interest rates.
A loan may come with a cheap nominal interest rate but expensive charges and fees. It is these fees and charges together with the nominal interest that make up the effective interest rate.
Apply to as Many Banks as Possible
Ensure that you apply to as many banks as possible so that your chance of getting approved for the best deal is higher. Additionally, since there is a proliferation of financial institutions and you may be confused as to which option is the best, sending out multiple applications will help. With multiple offers, you’ll have many options to peruse and pick the one that appeals best to you.
Note that there is no charge for applying; charges only accrue when you sign an agreement with a lender. Also bear in mind that it is important that you apply for the same amount and repayment period across board. Only then can you rightly determine which option is the best for you.
Use a Loan Agent
A loan agent or broker is an expert that works with several banks to help broker loans. This means that they help customers apply to as many banks as possible by just filling out one single form with them. These agents make the process very fast and efficient for you which is why they come highly recommended.
You do not have to pay a loan agent because they get commission from the banks that they are affiliated with for every customer that they broker a deal for.
Conclusion
If you find yourself in a financial bind and you own a home, you can leverage the equity in your home to take out a loan. Thankfully, there are many banks that will accept your home as collateral to give you a substantial sum at very good rates.
However, you must do your due diligence which this article has helped to start you out on by sharing the above tips. Bear them in mind and engage them to get the best deal on loans for any purpose.