How is real estate secured? Nothing secures the property; the land is the security. It secures the mortgage, and there are benefits to any type of secured loan.
- A real property secured loan has tangible benefits
- Real estate is good security because
Any asset can be security and make a loan less risky for a lender. Mortgages are an important type of secured loan because they are large and tied to land.
What results when a loan is secured by real property?
When real property secures a loan, the borrower pledges the asset as collateral for the debt. You may ask, what is collateral then? It is a guarantee that you will pay back the loan, or the lender will take possession of the property. Forbes points out four key results of securing a loan:
- Approval requirements are often lower than unsecured loans
- Interest rates are also generally lower
- The lender has the legal right to seize the collateralized asset if the borrower defaults
- Common types include car loans, mortgages, and secured credit cards
The result, if you pay your debt in a timely manner, is that you get better terms than with an unsecured credit. If you do default, the bank seizes the unsecured loan. In the case of real estate, that is your house. The foreclose, evict you, and sell the house to recover their funds.
Why is real estate regarded as good security?
Lenders regard real estate as good security because it is stable and not transient. To see this point, another common secured debt is a car loan. In this case, the collateral depreciates quickly. Often, a car can lose over half its value within the first two years. It is common that the vehicles value is less than outstanding amount owed when the bank repossesses it. In addition, the borrower can move the car and hide it.
Neither is a great concern with a mortgage. While the buildings on the land may depreciate, the land almost always appreciates, and the bank can count on the land’s value to be stable over time. Also, you cannot move land, so they will never have to search for it.
With credit cards the bank usually makes the customer pay for the amount up front to secure the card. In this case, there is no risk for the bank at all. Other times, though, they accept a bank account as security. In this case there is considerable risk because banks consider it liquid. That means it is easy to move the money and hide it.
Final Thoughts About How Real Estate is Secured
How is real estate secured? In this article we pointed out that real estate is security. The land is the collateral for the loan, the mortgage. We also showed why it is the best kind of security, and it is special for banks. It is so special that they have a unique loan just for real estate called a mortgage. These are noteworthy for two reasons: they are very large and very secure.
When you get a mortgage, you put up your home as collateral. That then becomes a significant risk if something happens, and you cannot make your payments. The bank will foreclose, and you will lose your home. It is a reasonable risk, though, because most people cannot pay cash for a home, and the terms of any other loan would be onerous.