A real estate secured loan is a type of financing where your property acts as collateral for the debt. This means the lender holds a legal claim, or lien, on your property until you fully repay the loan. Unlike unsecured loans, these loans are considered less risky by lenders because the property can be repossessed if you fail to make payments.
Your borrowing limit depends on your property’s equity—the difference between its market value and the balance owed on existing loans. Typically, lenders allow borrowing up to 80%-85% of your home’s value minus any outstanding mortgage balance, known as the loan-to-value (LTV) ratio, to protect themselves if property values decline.
Common Types of Real Estate Secured Loans
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Mortgages: These loans finance property purchases, with the new property serving as collateral. Lenders can foreclose if payments are missed. For details, visit our Mortgage glossary entry.
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Home Equity Loans (HELs): Also known as second mortgages, these are lump-sum loans based on your home equity, repaid over a fixed term. Learn more about Home Equity Loans.
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Home Equity Lines of Credit (HELOCs): Revolving credit lines secured by your home, allowing flexible borrowing and variable interest rates. See our detailed HELOC article.
Benefits and Risks
Advantages:
- Lower interest rates compared to unsecured loans due to collateral.
- Larger loan amounts available because of property backing.
- Potential tax deductions on interest for qualifying uses (e.g., buying or improving your home), as explained in IRS Publication 936.
Risks:
- Foreclosure risk if payments are missed.
- Closing costs such as appraisal and origination fees can be significant.
- Application process may be lengthy due to property appraisal and income verification.
Avoid These Common Pitfalls
- Don’t use your home equity for non-essential expenses like vacations or depreciating assets.
- Understand all loan terms, especially variable rates on HELOCs that can increase payments unexpectedly.
- Shop around and compare offers from multiple lenders to find favorable terms.
For further reading, consult IRS Publication 936 on mortgage interest deduction IRS.gov and learn about related concepts like Loan-to-Value Ratio (LTV) to understand how lenders assess loan risk.