The Truth About Equity And Repossession

There is lot said about equity and the action of repossession. However, usually due to the nature of the information, what has been said is imprecise to say the least. When someone takes a home equity loan or line of credit, he is indeed endangering his property; but up to what level? What does repossession imply? What is the difference with home loans?

These questions are to be asked and need thorough explanations with many legal concepts that are beyond the nature of this article. However, we can clarify some concepts and explain the basics about equity and repossession so you are well informed when searching for a suitable loan for your budget.

Understanding Equity

Equity is the difference between the home value and the outstanding debt guaranteed by the property. A home with a value of $100,000 and a mortgage loan of $70,000 has still $30,000 worth of available equity. This ideal portion of the property’s value can be used as collateral for a home equity loan.

With only a few differences, home equity loans are almost exactly as home loans. They are secured loans which can be guaranteed by the same property as a home loan, they charge a fixed or variable rate that is usually low compared to other types of loans and also provide longer repayment programs that can last up to 15 or 20 years.

Understanding Repossession

Repossession is a legal action the lender is entitled to when a property is used as collateral for a loan. This action lets the lender claim his money by forcing the lender to surrender the property. A proper definition would be: Repossession is the legal process by which a borrower in default is deprived of their interest in a property. The process usually means the property is sold or auctioned off with the proceeds going to the lender.

Basically, the legal action is feasible only when the borrower has defaulted on the loan. As long as the monthly payments are made on time, the lender can not do anything. Some other loan terms may trigger the availability of the action but these loan conditions are not usual.

The process provides the lender with an alternative method for recovering his money which reduces the risk of the transaction significantly with excellent consequences for the borrower: low interest rate, higher loan amounts, longer repayment programs, lower monthly payments, etc. The only risk being the possibility of loosing the property in case of default.

Difference With Home Loans

The only difference between repossession on home loans and on home equity loans is a matter of preference. Since the mortgage is logged first, in case of default, the mortgage loan lender is preferred over the home equity loan lender. Thus, the property is sold and the money is first used to repay the mortgage loan. Only after that is completed, the home equity loan lender can make use of the remaining money to recover his investment. And that is the main reason why, though home equity loans carry very advantageous loan terms, they are still a bit inferior than home loan terms.