Consolidation debt loan mortgage
A general assumption is that mortgage loans are essentially for purchasing a house or real estate, because the property being acquired is mortgaged to the lender, be it a banker, credit union, or any other financier. This is, however, not true. Mortgage loans are, of course, very useful for facilitating such acquisitions. But they can also be used for other purposes such as generating funds for down payment of another property, meeting some urgent large financial requirement, or consolidating all the existing loans.
Mortgage loans, in financial parlance, require a real estate property. Other loans do not. Real estate being less volatile in value when compared to other securities such as cars, shares, and even bonds, is regarded as a better security by the lenders. Additional advantage of real estate collaterals is that they do not depreciate like cars, and are not stagnant in value like bonds. Therefore, the lenders principal as well as interest are secured by future appreciation of these properties. This prompts lenders to offer concessions for such security.
There is another reason for lenders being more agreeable to offer mortgage loans. Mortgage loans are long-term loans. This means, there is no intermediate time span in which the lenders funds remain idle. If the lenders were to use the funds for shorter term lending such as car loans, then every couple of years, they would have to search for a new customer to loan the funds, apart from incurring expenditures towards advertising, and marketing. Every new customer implies additional administration work such as verification of credit record, income adequacy, and track record of employment, etc. These laborious tasks, if undertaken, will cost the lenders in form of staff remuneration, which can be avoided in case of mortgage loans.
If the borrower has already availed some mortgage loans from the lender for buying a house or other purposes, then the lender has a profile of the borrower. This information gives lender an idea as to whether the borrower will be able to meet his or her future liabilities. If the value of property has appreciated since the beginning of the mortgage loans, then the lender would be more inclined to lend additional funds by creating a second or third charge on the same real estate property. By doing so, all the debts of borrower can be brought under one roof. Therefore, it will be possible for lender to keep a tab on borrowers finances and determine when action needs to be taken in case if there is any probability of debt delinquency or bankruptcy filing. Otherwise, there is every possibility that the borrower is unable to meet his or her costlier debts, and lands in bankruptcy court. In such an event, the secured loans may also be affected. So, offering borrower a chance to bring down monthly payouts on other debts by offering a consolidated debt is a good strategy for keeping a tab on borrowers finances, apart from generating additional business for long term.
Unlike gold, and few other assets, the lender does not have to make special arrangements for keeping the underlying asset under its safe custody. Therefore, lenders can avoid costs associated with such security arrangements.
From borrowers angle, consolidation of loans is a good move because
- There is no danger of inadvertently missing out on any payments, leading to spoiling of credit scores
- The securities under other loans are released and can be sold to generate some funds, which can be utilized to clear some amount of indebtedness
- Mortgage loans carry lower rates of interests, and are therefore, much cheaper than other loans available in the markets
- Mortgage loans are repayable over long term, generally in equated monthly installments. This feature makes the loans manageable for the borrower.
- The payouts on mortgage loans are spread over a very long term. If inflation for each of the interim years is considered and the payouts are discounted at those rates, effectively, the actual amount paid by the borrower will be much less.
- Mortgage loans allow borrower to make optimal use of the equity in their homes and other real estate properties.
- Unlike some loans, which can be called up by the lenders during some credit squeeze, the lenders rarely call up mortgage loans.
- Taking a mortgage loan is advantageous from tax angle. This is because the interest paid to the bank or lender can be set off against income in case of some mortgage loans. However, similar advantage is not available in other types of loans.
- Periodic appreciation in value of the real estate property underlying the mortgage loan puts the borrowers mind at rest regarding loan liabilities. Similar relief cannot be experienced with other forms of securities and other types of loans.
- Mortgage payments are usually uniform in size. Therefore, over a period, the amount being paid decreases in ratio to the income. This is easier on the borrowers pocket.
- The borrower can avoid bankruptcy proceedings, or credit record blemishes with mortgage loans
- The borrower can continue to use the mortgaged asset, despite the borrowing.
In case of delays on mortgage loans, the mortgage lenders will be more accommodating as they have more reliable asset for recovering the dues. Another reason for the lenders being so accommodating is that the procedure defined for putting the mortgage property on auction is more laborious and time consuming. Therefore, if the delay is likely for only a coupe of months, the lender may choose to ignore it.
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