5 Reasons Banks Love Home Equity Loans

Banks generally love home equity loans because they present very low risk to the lender. Instead, the borrower assumes the majority of the risk and still pays a moderate interest rate in exchange for the financing. While some home equity loans are not favorable for banks, most are due to a number of factors.

#1 Home Owner is more Responsible

It is true that homes do fall into foreclosure and homeowners make mistakes. However, simply to get a mortgage in the first place, homeowners must show a responsible record with debt. As soon as a home is purchased, the borrower gets flooded with request to take out a home equity loan. Lenders see the buyer as "legitimate" due to the fact he or she achieved a mortgage.

#2 Loan Distributed by Loan to Value Ratio

It can be difficult for some lenders to determine appropriate limits for credit cards and personal loans. They are basing the limits solely on a person's income and supposed asset base. With a home equity loan, the lender simply decides to extend a certain percentage of the total home equity in the form of cash or credit. As a result, the bank spends less time and effort in the origination process for the loan.

#3 Secured Loans Less Risky

Any secured loan is far less risky for the lender than an unsecured loan. If the borrower defaults, then the bank simply calls in the asset in order to recover the loss. This is slightly harder with a subordinate loan than with a primary mortgage. In the end, though, the lender possesses a legal lien on the home and will use this to assure repayment is accomplished.

#4 Homes Can't Hide

When it comes time to repossess collateral, many borrowers attempt to evade the lender. For example, cars can be driven and parked off site. They can be sold off illegally or stripped for parts. Electronics can be hidden even easier. A loan against a lap top is highly risky since it is such a small object. A repossession company will not have such a hard time getting a home back once it has been foreclosed on. In fact, the city will help to enforce a foreclosure in most cases to assure the asset is actually passed to the legal title holder. An individual who remains in the home will be arrested for trespassing once the asset has passed into ownership of the bank.

#5 Home Values are Steady

For the most part, the value of a home is steady over time, making it an excellent source of collateral. If a bank accepts stock certificates as collateral, the stock value may decrease; leaving the lender will an asset lower than the actual value of the initial loan. For this reason, the loan to value on such an asset is very low.  A home, on the other hand, will typically increase in value over time. As such, the bank can be certain of recovering its losses in most markets. The only exception is a recessed housing market, which occurs rarely on the whole.

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