Backing Out Of A Loan
To avoid serious heartache later on, be sure to look over all the loan documents carefully before signing on the dotted line. You do have some recourse if you realize youve made a mistake, as long as you act quickly. Theres a federally mandated three-day cancellation rule that applies to both home equity loans and HELOCs, but you have to notify the lender in writing. That notice has to be mailed or filed electronically by midnight of the third day , or its void.
How To Get A Mortgage On A House You Already Own
Getting a mortgage on a house you already own lets you tap into the value of your home without selling.
The type of loan youll qualify for depends on your credit score, debttoincome ratio , loantovalue ratio , and other factors.
But assuming your personal finances are in good shape, you can likely choose from any of the following loan options:
How To Use My Home As Collateral For A Loan
When you use your home as collateral for a loan, you take out a second mortgage equal to all or a percentage of the equity you have in the home. Equity is the difference between a home’s appraised value and the outstanding mortgage balance.
This adds two additional criteria to the lender’s income and credit qualification requirements. The first criterion is that you are the home’s legal owner. The second is that either you own the home outright or the home is worth more than the outstanding balance on your mortgage loan.
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Although lender requirements on primary and secondary borrowers vary, you cannot pledge a home you do not own as security for a loan. The lender may require that the legal owner be the primary borrower and may not allow you to be a co-signer unless your name is also on the property deed.
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Do I Have Home Equity
If youve been paying off your mortgage for several years, then you likely have at least some home equity. As we explained above, you build equity as you pay down your mortgage. If you decide to use your home equity to take out a second mortgage, youll need to have your house appraised to determine how much it is worth. But, if youre simply curious about how much equity you have or want a general idea of how much equity you have before you head to your lender, heres how to do a quick estimate.
Home value= $376,000
80% of value = $300,800
How much you still owe on mortgage= $232,000
80% of your homes value amount you owe on mortgage= $68,800
In this case, you can expect to get a second for $68,800 or less.
Keep in mind that the number youll get from the above equation is just an estimate as youll only truly know the current value of your house when you get it appraised.
How Collateral Fits Within Our Triple C Guarantee
As you can see, collateral is a major component of a mortgage, but isn’t the only factor lenders look for when reviewing a loan application.
Commitment to close
We close quickly and on time because our process is different than most lenders, meaning less surprises. While most lenders take over 30 days or longer to close, we are able to achieve the same in as little as two weeks. That’s because we know the loan process inside out and share our knowledge with borrowers so they are able to prepare for their mortgage even before they apply.
Commitment to convenience
We offer a wide variety of innovative products, power by state of the art technology. This helps us evaluate market trends and find the loan terms that are most favorable for everyone involved.
Commitment to communicate
We have lenders all around the country who are experts in your local market. They are available to meet however and wherever is most convenient to you – whether it be through email, on the phone or even your local coffee shop. They can answer your questions and walk you through the loan process so you have a trusted friend along the way, not just a loan officer.
Being familiar with your local area allows lenders to be attuned to the current state of the market and regional specialties. This makes understanding the collateral component of the mortgage better for everyone involved.
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Fixed Rate Vs Variable Rate Loans
Before diving into the details of collateral, its helpful to understand some additional loan terminology. One important distinction is whether a loan has a fixed or a variable interest rate. A fixed rate is just as it sounds The personal loan interest rate stays fixed throughout the duration of the loans payback period, which means that each payment will be the same.
A variable-rate loan, on the other hand, is pegged to a floating rate that is typically associated with a benchmark such as the Fed or LIBOR. Usually, variable rates start lower than fixed rates because they come with the long-term risk that rates could increase over time.
Bank Or Investment Accounts
In some instances, obtain a personal loan with collateral by using investment accounts, CDs, or cash accounts as collateral. Every lender will have different collateral requirements for their loans. Using your personal bank account as collateral can be risky, because it ties the money you use every day directly to your loan.
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House Or Other Real Estate
For many people, their largest source of equity is the home they live in. Even if you dont own your home outright, it is possible to use your partial equity to obtain a collateralized loan.
If you use a home as collateral on a personal loan, the lender can seize the home if the loan is not repaid. Furthermore, it might take a while to get approved for the personal loan, because the bank has to verify your asset, which means you have to supply plenty of home-related paperwork.
What Does It Mean To Use Property As Collateral
collateral: an accounting concept tt collateral? In this category, collateral is described as tangible property or assets that borrower provides lender for a loan. An asset forfeits if the borrower stops paying off the loan by forfeiting it to the lender within the loan agreement. Its called a lien because the lender holds the right to get hold of the collateral.
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How To Pledge A Property
You must have the deeds in your name and the house must be in the Public Registry of Property. You must go to the bank of your preference. For now, mortgage loans are only granted by private banks. You must wait for the bank to make an appraisal of your home.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
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How Much Are Assets Worth
Lenders typically offer less than the value of your pledged asset, and some assets might be heavily discounted. For example, a lender might only recognize 50% of your investment portfolio for a collateral loan. That way, they improve their chances of getting all their money back in case the investments lose value.
When applying for a loan, lenders often quote an acceptable loan-to-value ratio . For example, if you borrow against your house, lenders might allow an LTV up to 80%. In that case, if your home is worth $100,000, you could borrow up to $80,000.
If your pledged assets lose value for any reason, you might have to pledge additional assets to keep a collateral loan in place. Likewise, you are responsible for the full amount of your loan, even if the bank takes your assets and sells them for less than the amount you owe. If you do not comply, the bank can bring legal action against you to collect any deficiency .
Installment Loans Vs Revolving Credit
An installment loan is issued for a specific amount to be repaid in equal periodic installments over the duration of the loan. These are generally good for borrowers who need a one-time disbursement.
For example, borrowers looking for a or a mortgage to buy a home will need an installment loan. An installment loan can be both secured and unsecured. With a mortgage, typically the loan uses your house as collateral.
With a line of credit , a borrower can spend up to a designated amount on an as-needed basis. For example, if you have a $10,000 line of credit, you can spend up to that limit using what is similar to a credit card.
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Lines of credit are generally recommended for recurring expenses, such as medical bills or home improvements, and also come in secured and unsecured varieties. If you took out a home equity line of credit, it would often be secured .
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When It Doesnt Make Sense To Use Assets As Collateral For A Home Loan
When your options for collateral are on the risky or low-value end, it is important to think carefully before proceeding. Stocks and bonds that are rising now, could plummet tomorrow. When these potential events coincide with an event that makes you unable to pay, you can find yourself losing assets along with the home.
For these reasons, it is critical to take the time to consult with a professional about your collateral and loan options. The right lender will take the time to make sure your choice is the right one for you.
If you would like to learn more about collateral home loans, we encourage you to reach out to our team. We are extremely knowledgeable on loans and are happy to make sure you have everything you need to make an informed decision.
Personal Loans For Bad Credit
Personal loans are individual loans that can be used for a wide variety of purposes, unlike auto or home loans, which must be used to purchase those specific products.
Because personal loans are so varied in purpose, not every personal loan will be used to purchase something with collateral value. As a result, secured or collateral personal loans are some of the most infrequently offered, with many major banks not offering them at all.
On the plus side, you may not actually need collateral to get a personal loan, depending on the size of the loan and your credit profile. Smaller personal loans with shorter term lengths may be available even for those with poor credit.
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How Does Collateral Work
Collateral applies to all kinds of secured loans, not just mortgages. For example, if youve paid off your car in full and the title is in your name, you can use that asset as collateral to borrow money for another expense. In this case, a lender can reasonably expect that youll pay the money back. If you dont, the lender is legally able to take your car.
Collateral doesnt necessarily have to be property, either. Some lenders let borrowers use their savings account as collateral. For instance, if you have $3,000 in your bank account or a CD, you might be able to use that as collateral to borrow more money. If you dont repay the money you borrowed, the lender can take your cash in that account instead.
There are rules around how a lender can recoup losses, however, depending on whether the loan is a recourse or non-recourse loan.
- Recourse loan: With a recourse loan, the lender is legally permitted to pursue other assets or sue the borrower to garnish wages. So, if you dont pay the loan back, you could lose your collateral along with future paychecks and other valuable property.
- Non-recourse loan: With a non-recourse loan, the lender has to absorb any difference between the value of the asset they seize and the balance on the loan. You still lose your collateral, but you dont run the risk of losing other property or money.
Mortgage Statement Or Notice Of Satisfaction Of Mortgage
If the house still has a mortgage, you must provide the lender with a copy of your most recent mortgage statement to prove the total loan amount, balance and monthly payments. This, along with an appraisal, tells the lender how much equity is available for use as collateral.
If the house is paid off, the lender needs to see the Notice of Satisfaction. This document confirms that the mortgage has been paid in full and that the previous lender has no further right to the property. It’s important because the rights of the first mortgage holder supersede any other claims, meaning the second lender might not be able to take the property if you default.
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How To Get A Home Equity Loan To Buy Another House
If youre interested in using home equity to purchase a new home, the value of your house will need to be high enough to support the loan, and youll have to meet your lenders requirements. Heres how to get a second mortgage to buy another house.
1. Determine the amount you want to borrow. Before taking equity out of your home to buy another house, decide how much you want and need. Home equity loans limit how much you can borrow. In most cases, you can only access up to 85% of the equity in your home. For example, if your home is worth $350,000 and you owe $250,000, you have $100,000 in equity. In this example, the maximum you would be able to borrow is $85,000.
2. Prepare for the application process. Your approval for a home equity loan will depend on multiple factors. The value in your home will determine the maximum amount of equity available, and your financial information will determine how much of that equity you can borrow. In addition, your lender will look at your credit score, income, other outstanding debts and additional information.
4. Apply to the loan with the best terms. Once you’ve determined the loan with the best terms, youre ready to apply. Youll submit the application and provide the requested information. Your lender will order an appraisal of the home or determine the value using another method.
How Do Lenders Determine Collateral
While lenders are experts in borrowing, they are usually not the authority on home values. To determine the true monetary value of the collateral for a mortgage, most lenders will rely on a professional appraiser, according to Investopedia. These real estate specialists will be able to evaluate a number of factors about the property to determine its value.
During a typical appraisal, a real estate professional will take an unbiased look around the home. They will inspect common aspects like the floor plan, appliances and square footage for the quality and aesthetic. They will also evaluate current market trends and the style and prices of similar houses in the neighborhood to estimate how much it could be sold for on the market. They will pass their appraisal on to the lenders to help them make their decision.
Some lenders will also want to know how much houses are selling for in the local area as well as recent tax assessments to get a full picture of the property value.
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Real Property As Collateral
Lenders may require real property, such as a house, as collateral for a loan. Home loans are a common example of a loan secured by real property. Banks generally approve home loans subject to a mortgage over the home.
The simultaneous operation of Torrens Title and Old System Title complicates the strict legal consequences of mortgages. However, the practical implications are the same. Under Old System, the mortgage technically operates as a transfer of the property. While the borrower repays the loan, they hold an equitable interest in the real property. Upon repaying the loan, the borrower has the equitable right to redeem the land.
Torrens Title, on the other hand, does not regard the mortgage as a transfer of property. Instead, it operates as a charge. The lender must register the mortgage with the land registry so that the mortgage appears on the Certificate of Title for that property. Therefore, a mortgage under Torrens Title does not need to, and does not actually create the same equitable rights and interests as a mortgage under Old System Title. However, the mortgage has the same practical use as collateral that secures the loan.
Borrowers may use real property as collateral for loans other than home loans. This typically occurs for relatively large loans. However, where the real property is still subject to a mortgage, the use of the property as collateral may require approval from the original lender.
What Is An Appraisal
Because the home becomes owned by the lender if you cant make your mortgage payments, the underwriter needs to know exactly what the worth of the home being purchased is through a process called an appraisal.
An appraisal is an unbiased professional opinion of a homes value. In the sale or purchase of a home, an appraisal is used to determine whether the homes contract price is appropriate given the homes condition, location, and features. In a refinance, it assures the lender that it isnt handing the borrower more money than the home is worth.
The lender will usually order the appraisal, but Federal regulations state that the appraiser must be impartial and have no direct or indirect interest in the transaction.
How Does the Appraiser Determine the Property Value?
How Much Does it Cost?
It usually costs between $450-$600 for an appraisal, depending on your property type and location. More expensive homes or homes that have more than 1 unit, cost higher to get appraised. The appraisal process usually takes anywhere between 3-10 business days. The report usually goes to the mortgage lender, but you have a right to receive a copy of the appraisal report you must request it though.
If the appraisal is at or above the contract price, the transaction proceeds as planned. If the appraisal is below the contract price, it can delay or ruin the transaction, as the borrower will only be approved for a loan at the lower amount.
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