Options for HomeOwners
Home owners are in a special position when it comes to secured loans. A home is often the largest investment an individual or couple will make and that property will continue to appreciate in value over time. The longer you stay in a home, the more your home will grow in value and the more wealth you accumulate as you pay down your mortgage and watch your house grow more valuable.
Banks realize that home owners are in a powerful borrowing position. Their home is often their most prized possession and banks have little fear that the average home buyer will fail to make payments putting that possession at risk. For this reason, there are attractive secured loan options available to homeowners using their home as collateral.
Home:
A home is often the largest investment an individual or couple makes. The financial arrangement, or mortgage, designed to purchase the home are secured by the home itself allowing lenders to offer very competitive interest rates. There are a wide range of mortgage options, but mortgages are all similar in that they use the actual property you're purchasing as collateral.
Once you're in possession of your home and you begin paying down the mortgage and the value of the property increases, your equity in the property increases. A home equity loan allows you to borrow against this equity effectively creating a second mortgage or lien on the home. The funds you've borrowed are secured by the home meaning a default on your original mortgage or the home equity loan gives the bank the option to foreclose in order to recoup their loss.
Mortgages:
The largest secured home loan is the mortgage used to purchase the home initially or as part of a refinance. There are a range of mortgage options including fixed and variable rate loans, government assisted loans and interest only loans. But all of these home loans are secured by the home itself. Very few people are in a position to pay cash for a new property. While there is satisfaction in owning a property outright, there are also benefits to leaving cash invested in other instruments and obtaining a mortgage - even if you don't technically need to.
In many areas, the interest paid on a home loan is a huge tax deduction. By owning your home outright, you are not able to take advantage of this tremendous tax savings. By taking out a loan for the purchase of your home, you'll effectively be paying more for the home over time, but you can counteract this by investing the cash you might have used for the home purchase in an account or instrument paying more interest than your mortgage.
If you arrange a mortgage for a new home with an interest rate of six percent, but invest the cash in a combination of instruments paying an average of seven percent over time, you'll not only be earning a net profit of one percent on your investments, you'll also be able to take full advantages of the tax benefits.
Home Equity :
When you have a sizeable investment in your home, you are able to access that equity in a special secured loan called a home equity loan. By borrowing a percentage of the equity you have in the home, the bank can offer you lower interest rates on the loan than other options. A home equity loan is often called a second mortgage as the home itself is used as collateral.
Funds borrowed in a home equity loan or line of credit can be used for almost any reason, but most homeowners use the funds for home improvement. Money borrowed against the home is used for additions or to upgrade the house making it more valuable. This effectively increases your equity and is an ideal situation all around.
