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Mortgage: How Does Collateral Affect my Mortgage?

Richard Latimer

March 4, 2022

A mortgage is a large loan, usually paid off over thirty years to buy a home or property. Mortgages are valuable to people who do not have the cash to purchase outright or only have a small percentage of money upfront.

Your comprehension of mortgages and what they are will depend on your understanding of specific key terms. The key terms you will need to have a good understanding of are:

  • Down Payment

The down payment is the amount you initially borrow or pay out of pocket to make the first payment on a home or property once you have been approved for the mortgage.

Typically, making a twenty percent down payment is advisable when signing up for a mortgage. Many first-time homebuyers make as little as a six percent down payment.

  • Loan Amount

The loan is the amount you borrow from your bank or lender to cover the remaining portion of the home’s purchase value after the down payment.

  • Loan Term

As the name suggests, a loan term is the set time you have to pay your mortgage in its entirety. It is in your best interest to make your monthly payments on time to ensure you pay your mortgage off on time.

Also, your credit score will benefit from it, making it easier to obtain mortgages in the future.

  • Interest Rate

The interest rate is the rate or amount it costs you to borrow for the loan.

Calculation: For example, fs your take a loan for $100,000 at a 3 percent interest rate, you will pay $3000 in interest annually.

Key Benefits of Mortgages:

There Are Some Many Benefits And Disadvantages Of Mortgages

A mortgage has pros or benefits, such as the standard thirty-year fixed-rate mortgage. With the payoff or repayment period being a significant amount of time, monthly payments are minimal.

Another good factor is having a fixed rate; you can rely on equal monthly payments. Taxes and insurance costs will vary over time.

The flexibility of a 30-year mortgage also draws many people to this payment plan. You can also increase your monthly payments if you want to clear your mortgage quicker than the initial loan term.

If you fall into financial hardship, you can fall back on making the original monthly payments without jeopardizing the integrity of your credit score by being late or incurring late fees.

Drawbacks to Consider:

Despite the flexibility a 30-year mortgage can offer, you still need to be aware of and analyze the drawbacks.

Interest rates tend to be slightly higher with this payment plan because the risk of not getting paid is spread out over a more extended period. Even though you will pay a lower monthly payment, you will pay more in interest, making the overall price significantly higher because of the accumulated interest payments over such a long time.

People tend to overborrow sometimes when they qualify for a bigger loan and have such a long repayment period. A pricier home will come with higher maintenance costs.

Definition Of Collateral

Your House May Become Collateral If You Apply For Mortgage

Collateral is the term used when referring to an asset a bank or lender uses to secure a loan. Collateral can be vehicles, real estate, or property such as expensive jewelry. The kind of collateral used in a loan depends on the purpose of the loan.

The purpose of collateral is to act as protection for the lender. If you default on your loan, not only does your credit score take a hit, but the lender also loses money.

To prevent the lender from losing money, in case you default on your loan, they hold something of equal or higher value they can sell to recuperate any losses in such an event.

🧠Remember: Loans secured with collateral usually come with lower interest rates than an unsecured loan, as they offer the lender a level of security and safety.

Types of Collateral:

There are several different types of collateral. The various kinds of collateral that exist are:

  • Residential Mortgages
  • Home Equity Loans
  • Margin Trading
  • Vehicle Loans

So, to recap, a mortgage is a form of secured loan in which the real estate or property is the collateral.

When you take out a mortgage, the bank or lender has a lien on the collateral (the home, property, or real estate). The lien on the property is the legal rights or claim or legal rights against the collateral if the borrower defaults to recuperate lost funds.

Once you enter into a mortgage, whether you go through a bank or private lender, one significant aspect they will want to know is the value of the home being purchased (collateral). This is a substantial variable in their decision to loan the money.

To determine the value of a home or property, the lender does not have the authority to make those calls. Most lenders rely on an appraiser to determine the monetary value of the collateral offered for the loan.

📝Key Fact: An appraiser is a trained professional who evaluates specific areas of a house to decide a property’s economic value.

The appraiser will assess the floor plan and appliances, obtain the property’s square footage, and examine the current market trend for houses of a similar caliber in the area.

After the appraisal is completed, their findings will be passed to the lender to review the loan application.

🧠Bear in Mind: If you fall behind on your mortgage payments, the consequences can be severe. Not only will you lose any money invested in the property, but your credit score will be negatively impacted if the bank decides to begin the foreclosure procedure.

What To Do If You Fall Behind on Payments:

Knowing What To Do If You Miss A Mortgage Payment Is Vital As You Could Face Foreclosures

You are not alone if you are behind on your mortgage payments. The pandemic has put many Americans and people worldwide in a bad position economically. At the beginning of COVID, many people were laid off from their jobs, causing a housing crisis with evictions and foreclosures going through the roof.

There are several options you have if you fall behind on your mortgage.

1.     Refinance your Home

You can refinance your home, and you’ll obtain a new mortgage with a new set of terms.

Criteria: To refinance, you need to have a 620-credit score. Your debt-to-income ratio cannot exceed 43%.

If the adjustable-rate mortgage is causing your interest rate to change sporadically, refinancing into a fixed-rate loan will help stabilize your payments. Before proceeding with the loan, it is advisable to consider how long it will take to recuperate the upfront cost, which averages $5,000 on refinancing loans.

2.     Mortgage Forbearance Program:

A mortgage forbearance suspends or reduces payments for a specified amount of time without incurring extra fees or interest.

🔥Hot Tip: Be sure to check how they will report your account to the credit bureaus when you call your lender to inquire about the forbearance program.

3.     Loan Modification:

A loan modification is an option to consider when reconciling a delinquent mortgage.

While forbearance programs are temporary and subject to change at any time, a loan modification is a permanent agreement that permanently changes the terms of your loan forever.

The bank or lender can choose to extend your current loan term or reduce your monthly interest rates. The end goal of this program is to lower your monthly payments, but you won’t be required to qualify for a new mortgage or pay closing costs out of pocket.

Personal Adjustments to Lower your Bill:

There are several other ways you can assist yourself in lowering your monthly payment.

1.     Homeowners’ Insurance Bill:

The first way is to reduce your homeowners’ insurance bill. Many insurance companies give discounts to people who bundle their home and auto policies. You can get quotes from other companies to see if you can get a lower rate or raise your deductibles(link).

2.     Tax Abatement Laws:

A tax abatement allows you to dispute anything with your bill and correct billing errors. The result is a lower tax bill and lower mortgage payments- research and study the tax abatement laws for your local jurisdiction.

A repayment plan can be negotiated if you miss installments, but you will have a higher mortgage payment. Loan terms are one hundred percent up to the lender, and you are at their mercy for the term and rates you get.

Foreclosure:

The process of foreclosing on a home allows the bank to recover money owed from an unsettled loan. The bank can either sell the property or take ownership.

Almost half a million properties were in one stage of foreclosure just last year alone.

🔑Key Fact: The United States has the highest percentages of foreclosure, eviction(link), and homelessness in the world.

By law, the borrower is given 30 days to repay their debt before the foreclosure process can begin.

Foreclosures are a lengthy process, and most lenders would prefer not to go through them. It opens massive windows for mistakes and could leave them with unwanted property for a while.

Below we have summarized the six key steps to the foreclosing procedure; however, remember that process can vary slightly between each state.

If you are looking for more information, take a lot of our posts solely on foreclosure, for further guidance.

Foreclosure Process:

  1. Payment default. The process is initiated once the borrower misses a payment and the lender has issued a notice of missed payments. Typically, rent and mortgage payments are due on the 1st of the month, but most lenders give a two-week grace period. If they have not received the money by this time, they are authorized to take further action. Once there have been two missed payments, the borrower will receive a letter of demand, which is more severe than notice of payment default.
  2. Notice of Payment Default NOD. The lender hands the loan to the foreclosure department of the state, county, or jurisdiction the property is located in. The bank or lender may grant the borrower another 90 days to settle the payments and reinstate the loan. The term for this is the reinstatement period. After 90 days have passed, some jurisdictions allow the letter to be placed directly on the home.
  3. Notice of trustee sale. If the loan has not been reconciled within the 90days, a notice of trustee sale will be recorded where the property is located. The lender must publish an ad in the newspaper with the owners’ name, address, legal description of the property, and when the sale will occur.
  4. Trustee sale. The property is listed for sale in a public auction. The highest bidder who meets all the requirements is awarded the property. Upon completion of the deal, a trustee deed of sale is provided to the winning bidder. The bidder or purchaser now owns the property and is entitled to immediate possession.
  5. Real estate owned. The lender will attempt to sell the property through a broker or with the assistance of a real estate-owned asset manager. If the property fails to sell in the auction, the lender becomes the owner.
  6. Eviction. The borrower can live in the property until it has sold. This is when an eviction notice is sent out for anyone living on the property to vacate. The sheriff usually visits the property to empty all people and belongings.

Round-Up: How Does Collateral Affect my Mortgage?

Your home is collateral as long as you still owe any money to the bank. There are many things you can do to lower your monthly payments.

If you fall behind on your mortgage, there are steps you can take to alleviate some pressure. Failure to do this will result in foreclosure, which means you will lose your home or property.

Check out one of our previous posts, for some key tips to managing your mortgage and some possible ways to get out of an agreement you cannot afford.

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