When you take out a mortgage, your home serves as collateral. Collateral is the property or asset you pledge to your lender as security for the loan.
Here’s why it matters: collateral is what makes mortgage lending possible. By reducing risk for the lender, it may allow borrowers to access lower interest rates, higher loan amounts and more flexible financing options than unsecured loans may offer.
At Newrez, we strive to make the process of achieving your homeownership goals as smooth as possible. If you’re in the market for a mortgage but you have questions about the process, our loan experts are glad to answer your questions. Read on to learn what “collateral” means in a mortgage context.
How Collateral Works
Collateral serves as security that gives a lender protection against borrower default. When a borrower pledges their property as collateral, a lien or security interest is created that binds the property to the lender until the loan is repaid.
If payments aren’t made as agreed, the lender has the legal right to foreclose and sell the property to recover what’s owed.
Note: Foreclosure isn’t the desired outcome for any party involved. At Newrez, if a borrower falls behind on their payments, we make every effort to work with that borrower so they’re able to catch up on what they owe. Learn more.
Loan-to-Value and Collateral Valuation
Because the property is used as collateral, lenders carefully evaluate its value. They use a loan‑to‑value (LTV) ratio, which compares the loan amount to the property’s appraised worth. Lower LTVs mean less risk for the lender and often better terms for the borrower.
Other Types of Collateral: Home Equity
A typical mortgage uses your property as collateral, but the equity you build up can also be used as collateral for cash. Home equity loans* and home equity lines of credit (HELOCs)^ enable borrowers to access cash based on property value minus existing mortgage debt. Learn more about the Newrez Home Equity Loan here and learn more about HELOCs here.
Collateral vs. Unsecured Loans1
Secured loans such as mortgages require collateral, reducing lender risk and typically resulting in lower interest rates and broader access for borrowers. Unsecured loans (such as credit cards and personal loans) exist, but because they don’t require collateral, they may carry higher interest rates and stricter credit requirements.
How Collateral Can Benefit Borrowers
- Better loan terms: Because your home backs the loan, lenders may be more willing to offer competitive rates.
- Access to equity: As you pay down your mortgage, you could build equity in your home. Equity can be tapped later through a HELOC or a home equity loan, providing you cash for renovations, debt consolidation or other needs.
- Borrowing power: Collateral makes it possible to qualify for larger loan amounts than unsecured credit typically allows.
In short, collateral gives lenders the security to offer qualified borrowers what they need to meet their homeownership goals.
Are you ready to take the next step in your homeownership journey? Reach out to our mortgage experts today and we’d be glad to walk you through your options.
References:
1Secured vs. Unsecured Loan: What’s the Difference? - NerdWallet
