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In both real estate financing and traditional financial loans, collateral is a term that often comes up when discussing risk protection and management.
But what exactly is collateral? And, why do real estate investors need to be aware of it when working on their investment portfolios?
If you want to know, you’re in the right place.
But first, if you want financing for your next investment and want to know what type of collateral may be involved, click the link below for a free strategy call with our mortgage team at LendCity to discuss your specific situation.
What is Collateral?
In finance and real estate, collateral is the term for an asset or piece of property used to secure a loan or line of credit.
That asset is then used as a primary security measure on behalf of the lender if that loan is defaulted on. If the loan is not repaid, the lender can repossess the asset and sell it to recoup their losses from the borrower.
Collateral and Leverage – Understanding Mortgage Basics
Collateral is one of the main factors associated with mortgages and using leverage in real estate.
When you get a mortgage to buy a property – or when you take out a mortgage on a property you own – that property is the collateral used to secure the loan. This is why the lender can take your property away if you default on your mortgage and go into foreclosure.
The same principle is true for other types of real estate leveraging techniques. This means tools such as home equity loans, HELOCs (Home Equity Lines of Credit), and more are using your property to secure the loan.
Sometimes, you may need multiple forms of collateral for a single loan. This can be in the case of more expensive financing products or getting a single blanket mortgage to cover various purchases at once.
Common Types of Real Estate Collateral
In real estate, collateral can take many different forms in a deal. So, here are a few of the most common ones you should know about.
- Mortgage Note on Property
- Allotment of Lease and Charge in Property
- Security Interest on the Assets
- Attachment of Personal Guarantee
Each plays significantly different roles, and the terms may vary based on the contract you have signed with your lender. So, to ensure you know what you are dealing with, ensure all contracts you receive are correctly reviewed and explained by a real estate lawyer.
If You Are Ready to Invest
If you are ready to start investing today and want more information about how your mortgage may be secured – or are looking to apply for a mortgage today – click the link below for a free strategy call with our mortgage team at LendCity today.