The Risks And Rewards Of Real Estate Backed Lending

We are going to examine the pros and cons of real estate backed lending

. There are two kinds of loans, a secured loan and an unsecured loan. There is no collateral to back up an unsecured loan. All you need to obtain this kind of loan is a signature.

On the other hand, to obtain a secured loan you must have collateral to back up the loan. This collateral is used as a guarantee that the loan is going to be repaid. The guarantee is that the borrower will sell the collateral used to pay back the loan. One form of collateral that's often used is property or real estate.

Since the risks are higher for the lender, unsecured loans usually have higher interest rates and the loan terms are less negotiable than for loans with collateral. A good example of an unsecured loan is when you use credit cards.

By using real estate as collateral, the interest rates can remain lower, keeping costs down. This is why the interest rates on home mortgages incurred from real estate loans are much lower than the interest rates on credit cards.

How Real Estate Collateral Works-

A collateral-based loan is simply a term loan requiring regular, periodic payments.

Most people have a real estate backed loan on their homes. This is called their mortgage.

When you obtain a mortgage, you can choose an adjusted-rate mortgage (ARM) or a fixed-rate mortgage. The adjusted rate mortgage is more risky, because it has a rate that varies according to the market.

Having a fixed rate mortgage means the interest rate remains the same over the life of the loan regardless of the market. Fixed rate mortgages are usually for either 15 year or 30 years and the monthly payment will be higher for the 15 year fixed rate loan that it is for a 30 year mortgage.

Benefits of a Real Estate Backed Loan-

When you take on a larger portion of the risk, you will be given numerous benefits:

A loan is easier to obtain when it is backed by collateral in the form of real estate.

Lower interest rates means less money spent on the money you borrowed. On the whole, having real estate collateral gives you advantages when you're negotiating for a loan.

When you assume the greater portion of the risk and make timely payments, you are building a positive credit history. This makes you look good to future lenders. The Risk Associated with a Real Estate Backed Loan The risk of losing the real estate that you used as collateral is the main drawback of this kind of loan. Defaulting on this kind of loan is what causes banks to foreclose on a home. Real estate backed lending does have a lot of benefits as well as inherent risks.

by: Dale Klein

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