Loans Secured by Residential Property

Loans secured by residential property, are when homeowners pledge home equity as collateral. If the borrower doesn’t pay the loan back, the lender can recoup losses by selling the collateral. Since the lender has a lower risk, they can charge the borrower a much lower interest rate. The most common form of this loan is a home equity line of credit (HELOC), but there are other types of loans as well.

HELOCs can be beneficial if used properly. The one issue is when real estate prices move quickly, the amount of equity homeowners will have access to can fluctuate. In the event real estate prices ever fall, this amplifies risk for homeowners because they would lose not only the on-paper value of the home, but the debt remains the same until paid down. This could leave borrowers with less equity than they expected.

The balance of loans secured by residential property reached $303.41 billion in August.