Why Are Home Equity Loan Rates Lower?

Home equity rates are typically lower than other secured loan options. The reason they are is because the loan represents less risk to the lender than other loan options. Whenever a loan is less risky, you will find you are rewarded with lower rates. However, you should be aware the loan is only less risky for the lender; in this case, you will be assuming the vast majority of the risk of the loan.

Value of the Loan

Large loans typically have lower interest rates than small loans. The reason for this is simple. A lender does not have to assess a high fee to make a profit. Smaller loans, such as a loan for an appliance or a computer, will have higher fees. The loans also tend to be very long. In fact, it is not uncommon for a home equity loan term to be as long as a regular mortgage. While some loans have higher interest rates when they are paid off over a longer periods, home equity loans are different because of the large profit the lender can make through extending such a large loan over a significant period of time.

Recovering the Asset

A second reason these loans are lower is because it is much easier for a lender to recover the loss incurred from a home equity loan default. First, it is impossible to hide a home like some people hide a car, computer or other small asset. The lender can assure they will be able to locate the asset at any given point. While a housing recession can cause the value to shrink, this occurrence is very rare. A car, for example, will always decrease in value, while a home will not. Because of this stable value, the lender has less to worry about if they do have to seize and liquidate the asset.

Borrower Assumes Risk

These factors mitigate the risk assumed by the lender, but they greatly increase the risk assumed by a borrower. In fact, home equity loans are among the riskiest in the entire loan market for you, the borrower.

Your home is most likely your most valuable asset. More than an asset, though, it is the place where you and your family live. If you lose your home, you will lose a lot of money and equity. You will also lose the roof over your head. There are few options for a person to locate an acceptable residence after a foreclosure.

Also, it is not correct to assume you cannot go into foreclosure based on a home equity loan. In fact, if you default on this subordinate loan, the secondary lender can purchase your mortgage. Even if your mortgage is otherwise in good standing, the lien holder now possesses the full title to your home. Since you have defaulted on your home equity loan with this lien holder, they can seize the asset to cover the loss.

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