A home loan taken out with a security arrangement otherwise known as a mortgage is a common arrangement with most banks and lenders. However it remains to be seen whether or not it is advantageous to the borrower/mortgagor. This article will discuss some of the pros and cons of a secured home loan.
Define and Differentiate
At the onset it is important to differentiate a loan with a mortgage. The former entails borrowing money goods or credit with payment of principal and interest. The latter results in the same arrangement but with an additional clause that in case of failure to pay a specific number of amortizations (installments) the property used as security will be foreclosed upon, either judicially or extra judicially. The security property maybe the property bought via the loan and/or a different property. It may be real or personal, tangible or intangible, provided both parties agree to the same becoming the security or collateral.
The Good
The first and most obvious advantage is the fact that a loan with mortgage increases the chances of loan/mortgage approval. This is especially true if the collateral has high demand, is of significant value, and easily disposable. This is because loan approval is all about controlling and managing the risk of loss. If the collateral is valuable and marketable then the risk of loss is zero or minimal.
Another advantage is the fact that the application process gets fast tracked. This is because once the risk of loss has been determined as zero or minimal the only hurdle is the procedural aspect of the application. Of course this presupposes the collateral is free from any other encumbrance that will negatively affect the security arrangement with the lender/mortgagor.
Second, lower interest rates can also be expected. This is because interest rates are used to control and factor in risks. Simply put, the lower the risk the lower the interest rates and vice versa.
Third, aside from the interest rates, the loan terms should also be better. This is based on closing costs, type of mortgage, prepayment penalties, etc. Of course to maximize this advantage the borrower/mortgagor must negotiate knowing the industry standard for his/her financial situation.
The Bad
The most obvious disadvantage is the fact that none payment of a specified number of installments may cause the borrower/mortgagor to lose the mortgaged property. Worst case scenario is that the foreclosure may not even totally wipe out the debt. And in some cases the collateral may not even be the purchased property.
A less obvious disadvantage is the fact that you reduce or deplete the equity of the security property. For example, Mr. A mortgages his home worth $300,000. The cost of the mortgage reduces the equity of the home to half its market value. This in itself is not a bad thing, but it will deprive Mr. A of the opportunity cost for the entire equity just in case he needs it for emergency purposes.
In Closing
A secured home loan may or may not be advantageous to the applicant borrower/mortgagor. However in order to actually realize and maximize the advantage the arrangement must be entered into not only willingly but knowingly. And with clause modifications and insertions advantageous to the borrower/mortgagor, such as the number of defaults, notice of defaults, redemption period, etc.
