Buying your first home can be incredibly exciting, but that excitement does not come without a fair amount of financial stress, as the majority of people will need a loan when buying a home. It can be tough to know every type of loan available to you, and what sets one loan apart from another.
One of the most popular options is a secured home loan. Today we want to talk with you about what exactly a secured home loan is, how it works and why you may want a secured home loan over other types of available loans.
What is a Secured Home Loan?
So, what is a secured loan? A secured loan is a loan that is backed by collateral that you already own. This can be something like a house, a car, an expensive boat, or other high end items you may own. What sets a secured home loan apart from other types of loans is that if you do not end up paying the loan back, the bank or lender will take whatever collateral you put up with the loan away from you.
A secured loan is relatively easy to understand for most people. You have a lender that will accept a specific piece of collateral to ensure that you will pay the loan on time. Most people do not want to lose their assets, so they make payments for the loan on time. In this way, collateral is effectively used as an incentive to make sure the borrower pays off the loan on time.
How Does it Work?
Just like any other type of loan out there, you have to apply for a secured loan. When you do this, your lender will ask what you would like to put up for collateral to back up your loan. If you end up struggling to pay the loan at any point in time, the lender can end up putting a lien on the collateral. If you do not already know, a lien is a legal way to say that the lender will claim the collateral.
Do not let this scare you off too much. Most people deal with financial struggles at some point or another, so it may be reassuring to know that a lender can keep the lien active until the loan is fully paid. This means that as long as you eventually pay back the loan, you can get your collateral back.
It is important to know that sometimes a borrower defaults on a secured loan, resulting in the collateral being forfeited to the bank as a result. In this case, the lender (the bank) can take the collateral and sell it to make up for the amount of money they have lost on the loan. Obviously if it reaches this point, you will not be able to get your collateral back.
It is absolutely crucial for a secured home loan borrower to understand what assets they are using as collateral. When you have a secured home loan, generally that collateral is your home. If you start to miss several payments, the bank or lender can mark your home down as foreclosed. This means that you lose your home, and the bank ends up owning it.
Final Thoughts on Secured Home Loans
Getting a secured home loan is a huge step in someone’s life. It can be quite scary putting your home up as collateral, not knowing if you are going to be able to make payments for several years to come. It takes a lot of planning and preparing to make sure you use a secured home loan properly.
That said, you need to have a realistic plan to pay the loan back, while acknowledging the risks associated with being unable to pay off your loan on time. You also should have a backup plan in place in the event that financial struggles happen in the future. As long have realistic expectations and a ‘savings cushion’ to protect you from unforeseen financial hurdles, you should be on the right path. The last thing you want is to end up without a home because of an unforeseen financial snag.
Contact Fairfax Mortgage Investment For More Information
If you still have questions or want to learn more about secured home loans, feel free to reach out to Fairfax Mortgage Investments. They will be able to answer your questions and give you more information so that you are prepared for securing a secured home loan.