There are many ways to finance your next real estate deal, and many people overlook some of their best options. If you have not compared a secured vs unsecured loan package, then you may be missing out on tools that can save you huge amounts of money and give you the leverage to buy bigger and better property. Here are some of the advantages of each type of loan so that you can make an informed decision from the information.
What Are the Benefits of a Secured Loan?
Because a secured loan is backed up by a hard asset, the borrower is less of a risk to a lender. The increased value comes directly from the fact that the bank can take possession of the asset if the borrower defaults on the loan. The bank may require holding the assets until full restitution is made on the loan, so consider that you may lose the utility of the item if you secure a loan with it.
The decreased risk profile of the borrower has many benefits. The main benefit is a lower interest rate on the mortgage, a single line item that can save a borrower hundreds of thousands of dollars over the life of the loan. It can also substantially lower the monthly payment that a borrower pays, bringing bigger houses down into the budget of the borrower. Depending on the amenities that the borrower is looking for, this can be a very big advantage for a secured loan.
Securing a loan with a hard asset may also keep a borrower from having to pay private mortgage insurance (PMI) if that borrower is able to redirect more funds into a down payment away from the other expenses of the homeownership process. This is another savings that can add up to tens of thousands of dollars over the life of the average loan.
What Are the Benefits of an Unsecured Loan?
An unsecured loan is like a line of credit from a credit card. Although the interest rate on this type of loan may be higher, it is the ultimate sign of trust from lender to borrower. A lender is basically saying that a borrower will pay back a loan without any added incentive outside of the loan agreement. Yes, a lender can take a house back if it is not paid for; however, this is much more trust than a lender that requires a hard asset of a borrower in addition to a written promise to repay.
An unsecured loan does not require a transfer of a hard asset, meaning that the borrower loses no utility in his other property. These properties may then be redirected into creating new income streams for the borrower, streams that may be able to help pay off the property loan.
There is also no restriction on the use of funds with an unsecured line of real estate credit. Borrowers can use the money for anything including the acquisition of new properties or the renovation of current properties. In most cases, the liquidity that these kinds of loans offers is unmatched when compared with a secured loan.
An unsecured loan usually gives a borrower an option to pay mortgage points, but this is not a requirement. Borrowers save on the front end because they do not have to add these mortgage points to the closing costs. This is even more income that can be put towards the acquisition of new properties or the renovation of old ones.
Finally, there is a great deal of hassle that the borrower does not have to go through when dealing with unsecured loans. Bankers usually require much less documentation of borrowers who are unsecured, and there is no appraisal or reporting to personal credit reports. All of these items give borrowers much more freedom than they would have with a secured line of credit.
Is a Secured or an Unsecured Loan Right for Me?Â
Only you will be able to tell if a secured or an unsecured loan is the right move for you; however, there are some comparisons that you can take into account. You will need to know your priorities in purchasing real estate before you can tell what kind of a loan will help you. Do you need to save money on the front end, or are you more concerned with the total payment over the life of the loan? Are you looking to stay in the property for a long time as a resident, or are you trying to flip the property and move into bigger commercial efforts?
Take a hard look at what you are actually trying to accomplish with your real estate purchase. Take note of the money that you have on hand. Compare the money that you will be paying out to other deals that are on the market. You should also take into account the emotional attachment that you have to any assets that you would give up for a secured loan. Are you okay with losing the utility for those items? If not, then you may want to reassess your choice of loans.
2 Point Highlight
Securing a loan with a hard asset may also keep a borrower from having to pay private mortgage insurance (PMI) if that borrower is able to redirect more funds into a down payment away from the other expenses of the homeownership process.
Bankers usually require much less documentation of borrowers who are unsecured, and there is no appraisal or reporting to personal credit reports.
