Introduction to Secured Loans with Real Estate Collateral
Securing a loan using real estate as collateral is a common practice for those in need of additional funds. This process is particularly useful for individuals who have built up enough equity in their properties but are still carrying a mortgage. If you have a property with a mortgage, you may wonder if it can be used as collateral for a loan. Below, we will explore the eligibility criteria and the possible loan options available.
Eligibility Criteria for Using Real Estate as Collateral
If you have a property that you are still paying off a mortgage on, you may still be able to use it as collateral for a secured loan. However, this option depends on the equity you have built up in your property. Here, we will discuss the conditions under which your property can be used as collateral.
Need to Pay Off the Mortgage First?
One common question is whether the mortgage must be paid off before securing the loan. The answer is not always straightforward. If you have enough equity built up, you may qualify for an equity loan without needing to completely pay off your first mortgage. Equally, you have the option to refinance your home.
Understanding First and Second Liens
When you take out a mortgage, you place your property in what is known as the 1st lien position. This means that if you stop paying and the property goes into foreclosure, the 1st lien will be paid off before any other loans. With a new loan, the lender would need to agree to take a 2nd or 3rd lien position, which significantly limits the options available.
It is crucial to consider how much you still owe on your mortgage and how much the property is worth. Unless you are a veteran and can qualify for special VA financing, no lender will allow you to be over-leveraged. You must ensure that you do not owe more than the property is worth with the current and new loan combined.
Loan Options for Real Estate Collateral
1st Choice: Cash-Out Refinance
The most common and practical option is to refinance your property with a home equity loan, also known as a cash-out refinance. In this process, you essentially start over with a new mortgage. Typically, lenders can lend you up to 80% of what the home is worth, referred to as the loan-to-value ratio (LTV). For example, if you owe $60,000 on a $100,000 home, you could get a loan for $80,000, receiving $20,000 in cash:
$100,000 * 80% $80,000
$80,000 - $60,000 $20,000
2nd Choice: Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) is another option, although it is not offered by all mortgage companies. Many small local banks and credit unions provide this product. HELOCs generally allow you to borrow up to 50% to 90% of your home's value. The terms can vary, and you will need to shop around for the best rates and conditions.
3rd Choice: Second Lien
A second lien is the most expensive option, but it offers flexibility. Your interest rate may range from 6% to 9%, but you could potentially borrow up to 95% to 97% of the home's value. Like your original mortgage, you can choose between adjustable rate ARM (Adjustable Rate Mortgage) and fixed rate options, with various amortization periods.
Impact of COVID-19 on Mortgage Banking and Real Estate
Lastly, it is important to consider the impact of COVID-19 on mortgage banking and real estate. The pandemic has led to tightened credit standards as a result of the increased risk aversion of regulatory bodies such as Fannie Mae, Freddie Mac, and HUD/FHA, as well as investors. When conditions return to normal, non-Qualified Mortgage (QM) loans will become more readily available.
In conclusion, if you have a property with a mortgage, you may still have options to secure a loan using your real estate as collateral. Ensure you understand the eligibility criteria and explore the various loan options available to you. With careful planning and research, you can find the right solution for your financial needs.