You could compare insufficient equity in your property to having insufficient funds in your checking account, in a way
If you write a check on that checking account and it bounces, gets sent back, and you get slammed with overdraft fees, the banks not going to be happy, and neither are you
In the case of a home with insufficient equity, your house won't be worth enough money to cover the cost of the loan, which might include all of the associative fees of the loan that may be considered in processing it.
If the market value of your home is less than what you owe on it, your going to have tough time refinancing it.
Let's consider a home equity line of credit.
This type of loan requires that you apply, and seek approval, for a Home Equity Line of Credit (HELOC) which attempts to bring down the size of your debt burden and also reduces your available assets.
A HELOC also makes it possible for you to consolidate your revolving debts and possibly reduce your interest rates.
But it comes with some upshots that you might have to give some real consideration to before you sign for this type of loan.
It's generally considered a short-term fix that can put your home at risk since you'll possibly entirely eliminate the equity you have in your property.
It also makes it much more difficult for you to refinance your home since you might not have enough equity to meet lender requirements for the loan.
When you get ready to sell your home you might not have enough equity to pay agent commissions or closing costs. A HELOC could can increase the total debt paid and might not help you reform your pattern of spendind.
These loans are secured by collateral.
A secured loan is a loan which is taken against some form of collateral. The borrower can secure the loan by securing their property with the lender. The home should have the required equity, enough value to cover the cost of the loan. A home with no equity or insufficient equity cannot be used as collateral and the loan will be denied if the home is required as collateral.
Always remember that, in real estate, equity is the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.
Wouldn't it make sense to the lender that if the property is worth less than what the owner would owe on the mortgage or HELOC that the loan should not be approved when the home isused as collateral ?
What do our lenders have to say about it ?
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