Home owner loans
Home is one asset that has and will always have some value. Unlike shares, the prices of homes appreciate steadily, albeit slower in comparison. In addition, there are some sudden spurts in prices too . As an investment, home offers these types of returns, apart from savings in rentals.
There is another major advantage that residential properties offer. Because of the inherent value, all bankers and lenders consider these properties as suitable collaterals.
This gives homeowners an eligibility to avail homeowner loans.
Salient features of homeowner loans are:
a. They are long-term loans
b. They are secured loans
c. Residential property becomes the security for these loans
d. They are generally large loans
e. They are repayable in regular monthly installments comprised of an interest component and principal component
f. As the repayment is spread over longer period, the periodic installments are much lower than other unsecured loans
g. Credit rating of the borrower is not an issue, as the amount loaned is secured against residential property and not against the earnings of borrower
h. The loan can be increased as the time passes by, based on the increase in value of the residential property forming the collateral
Borrowers take homeowners loans for
a. Meeting unforeseen financial exigencies
b. Tax benefits on interest being paid to the banker
c. Clearing costlier loans. Interest rates on these loans are much lower when compared to other unsecured loans in the market because of the secured nature of the loan . Such a measure is effective way of bringing down interest rates . These loans can also used to retire a costlier secured loan that may have been taken during higher interest rates regime .
d. Consolidation of all loans. Often times, the borrower ends up borrowing smaller amounts from different sources . It could be a car loan, equipment loan, personal loan or any other form of loan . These smaller loans may or may not carry higher interest rates . Even secured loans from multiple sources can be consolidated under homeowners loans, so that underlying securities such as shares or bonds can be released for selling. Such consolidated borrowing puts borrower in better position to bargain on interest rates, especially if the borrowers track record on the other loan repayments is good.
e. Purchasing some other property, things, equipment, business, etc., with the borrowings. These loans offer cheaper options for deficit financing when compared to other unsecured loans. Therefore, if a borrower desires to acquire a second residential property, and is eligible to get only 80 percent of value of that property as home loan, then he can consider covering up the balance through raising loan on the first home. Similarly, credit requirements for business can be met through this form of loan, provided the borrower is able to generate higher rate of return.
Disadvantages of taking homeowners loans
a. Risk of losing the residential property in the event of failure to repay the loans
b. Long tenure of repayment, generally from 10 to 20 years.
c. Inability to raise further loans on the property without clearance from the first lender, even if the value of property increases
d. Inability to sell the property without clearance from the lenders with whom the property is mortgaged
e. Because of lower installments, the borrower is likely to be become complacent about future repayments.
Secured loans are last to be disturbed in any bankruptcy proceedings. Therefore, the borrower will get little respite on the dues, if any, outstanding against this type of loan in bankruptcy proceedings.Other Articles
