How Do Loans for Homeowners Work?

By: Melissa Kellett

When you think about loans for homeowners, secured loans immediately come to your mind. However, the benefits of homeownership extend to unsecured loans too. Loans for Homeowners include secured and unsecured loans specially tailored for those who have possession of a property.

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The main benefit of loans for homeowners is the lower interest rates charged for the loans. Home Loans and Home Equity Loans are probably the loan types with the lowest interest rates and of course only accessible for home owners (or first time home buyers too in the case of home loans). Their secured nature offers fewer risks for the lender and thus, lets them charge a lower interest rate because they are almost completely sure they will recover their money.

However, when applying for unsecured loans, homeowners usually get lower interest rates than non homeowners. This is due to the fact that unsecured home loans, though not secured with a particular asset, are actually guaranteed by the overall assets of the borrower. The sole difference being that the lender cannot take direct legal action against a particular asset and has to go against the whole debtor's real property and personal property.

Secured Loans And Unsecured Loans

For homeowners, when applying for secured loans or unsecured loans, the benefits of ownership come from the property's value. The whole property (independently of it's value) guarantees home loans and entitles the lender to take direct legal action against it to recover his money in case of default. The rest of the borrower's assets also guarantee the loan but the lender has neither direct legal action nor any priority at the time of collecting the money if other creditors are present.

When it comes to home equity loans, the property's equity (difference between the property's value and the remaining of the home loan debt and other liens) guarantees the loan and the lender has a priority at the time of collecting to recover his money from the selling of the property up to the equity's value. The rest of the borrower's assets also guarantee the loan but the lender has no priority over those assets.

As to unsecured loans, there is no specific asset guaranteeing the loan. The whole value of the debtor's assets guarantees the lender that he will recover his money. But, there is no direct legal action or priority protecting the lender and if legal actions are necessary he would have to share the money obtained from the selling of the debtor's assets with the rest of the creditors if present.

Those are the main differences between secured and unsecured loans. As you can see, all the borrower's properties are always a guarantee for the lender. However, the law recognizes certain actions, benefits and priorities to those lenders who lent money against a particular property. This gives extra certainty to the lender and thus, the interest rates charged are lower. But since the property's value is always part of the lenders assets, even with unsecured loans, homeowners get lower interest rates.

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