By: Amenda Dorothy
The popular way of raising funds for homeowners is now the loans against residential property. Debt consolidation, financing home improvements, even paying for a new car – all these purposes can be fulfilled with these loan plans. However, as with other financial agreements, it is only sensible to take your time when deciding whether to go ahead.
With loans against residential property, you could be betting your home for a successful outcome. Hence, you should consider the following things before making a loan application.
Firstly, it is an inescapable fact that taking out a secured loan could potentially put your home at risk. When you fall behind on your repayments, the lender can apply to seize your property; evict you from it, and then sell it at less than market value to clear the debt. This is, in fact, a fairly rare outcome, and most lenders are happy to work with you if you do get into trouble. Repossession is the last resort of the lender, but you should consider this carefully before taking out a loan.
The second problem with secured loans is that they tend to be for fairly high amounts, meant to be repaid over a fairly longer term. This means that the amount of interest you will pay over the entire term may be considerably higher than you might think. Even with a low APR, these loans are not always the cheapest options. Thirdly, if you use this loan to wipe out some existing unsecured debt, you may get the illusion that your debt levels have lessened. There is then always the temptation to use your credit cards to build up fresh debts. After it you will have secured and unsecured debt hanging over your head and you will be in a worse position than ever before.
The fourth problem with a secured loan is that you will be, by its very nature, removing equity from your home. In other words, the value of your home and the amount of debt secured on it will be much closer to each other. Considering the fact that many experts are predicting a fall in the residential property prices in the near future, you could be left in the unenviable situation of owing more than the worth of your home - that is, you could fall into negative equity. The fifth problem is also related to the removal of equity from your home. In future, if you wish to take advantage of a refinancing offer to reduce your mortgage costs, it helps to have as much equity available as possible in order to secure the best deal. A secured loan can harm your re-mortgage prospects in the future.