Is a mortgage secured or unsecured debt?

While there are many different types of loans out there, they can all be divided into two basic categories: secured and unsecured loans. A secured loan is one that has collateral that you’re at risk of losing if you stop making payments, such as a home that could be foreclosed on or a car that could be repossessed. Unsecured debts have no collateral, but you’ll still face damage to your credit and potentially legal consequences for missing payments.

Next, we’ll break down what ‘secured’ really means for a mortgage and how home equity loans and refinances fit into this kind of debt.

Is a home loan secured or unsecured debt?

A home loan is secured debt. The property you purchase using the mortgage serves as collateral for the loan, which is one of the things that helps keep mortgage interest rates lower than an unsecured debt and makes lenders comfortable with offering long repayment terms.

Unless you’re buying a house in cash, you’re probably taking out a mortgage, a loan specifically meant for purchasing a home. As you can imagine, these are usually big loans. Because they’re being used to buy houses, the house is put up as collateral. This means that if you can’t pay off the loan, you’re at risk of losing the house. The lender can follow a certain process and foreclose on the home unless you can get back on track.

You might hear people talk about different things related to mortgages, such as mortgages, notes, and deeds of trust. These are similar but slightly different things.

When you get a mortgage, you sign paperwork that is a promise to repay the loan and ties the loan to your home. This contract is the note, which creates a legal claim for the lender on your home, making the loan secured. A mortgage or deed of trust, depending on your state, is a legal document that gives the lender the right to take your property if you fail to pay under the terms of the note.

What about home equity loans and home refinances?

As you pay your mortgage, you build equity in your home. Think of it as how much of the house that you own. A home equity loan lets you borrow against that equity, taking a second mortgage out on your home. Second mortgages are a form of secured debt as well. People often use these loans to fund home renovations or emergencies or to consolidate high-interest debts.

Home equity lines of credit (HELOCs) are quite similar to home equity loans. They are also secured debt but let you borrow multiple times up to a limit rather than giving you a single lump sum.

Meanwhile, a refinance is when you replace your current mortgage with a new one. This new mortgage has new terms, such as a different length of time or a better interest rate. Once again, you’re still borrowing against your home, and failing to pay can result in foreclosure. Even though the loan terms may change, the loan is still secured by your home.

Secured vs. unsecured debt: How they differ

Secured debt is considered more secure by lenders because collateral gives borrowers a clear incentive to pay back their debt. Some examples of secured debt are:

• Mortgages
• Auto loans
• Home equity loans
• Secured credit cards

Meanwhile, unsecured debt does not have collateral. You’re not agreeing to give something up if you’re unable to pay the debt off. Unsecured debt might be:

• Student loans
• Personal loans
• Medical debt
• Unsecured credit cards (most credit cards)

Both types of debt can have serious consequences if you fall behind on payments. They key difference is whether you’ve pledged an asset as collateral.

Collateral

As we’ve discussed, collateral is something you put up as security when you take out a secured loan. This means that if you don’t pay back the loan, the lender has the legal right to seize that asset or property so they can recoup their losses. When you offer a home for collateral, a lender has what’s called a lien on the property. The lien gives them a legal claim to the property that they can use to recover money owed.

Once you pay off the loan, the lender is required to release the lien, and the home is all yours.

Loan conditions

Unsecured loans usually have stricter requirements than secured loans because they are riskier for the lender. They have a lot more to lose if you fail to pay back a loan without collateral, so they want to be sure you’re a creditworthy borrower likely to pay it back.

Credit score requirements

As we explained, unsecured loans are riskier for the lender, and requirements can be stricter. Your credit score gives lenders an indication of how able you are to pay back debt, so the higher the number you have, the better luck you’ll have in getting a loan with a good interest rate.

Just because secured loans might have lower credit score requirements, it doesn’t mean you shouldn’t try to improve your score before considering homeownership. Because a mortgage is such a large loan, you’ll still need a good score, and you’ll probably get better interest rates if it’s on the higher end.

Interest rate

When you pay back a loan, you’re not just paying the principal, or the amount you borrowed. You’re also paying interest. The interest rate is a percentage of the principal charged by the lender. The longer it takes to pay a loan back, the more you’ll pay in interest.

Unsecured loans often have higher interest rates because the lender doesn’t have collateral to fall back on.

Higher loan amounts

Because secured loans have collateral to ensure the borrower pays back their debt, they are generally higher than unsecured loans. They are lower risk for the lender, so the amount offered can be higher.

Student loans are a possible exception here. While they are unsecured, they can easily climb into the range of six figures.

What happens when you can’t pay off a loan?

Failing to pay off a secured loan has very different results than failing to pay off an unsecured one. The biggest difference shows up when you fall behind. Secured lenders can pursue the collateral, while unsecured lenders usually pursue collection options.

Secured loan

Failing to keep up with payments on a secured loan can result in losing the asset or property you have as collateral. This could be your home, car, or anything else that helped you get approved for the loan.

A late payment becomes delinquent once it becomes past due. Many lenders will report it as a late payment once it meets a certain threshold. Generally, default occurs after an extended period of non-payment. Timelines and policies vary by lender.

When a homeowner receives a notice of default on their property, they have the option to communicate with the servicer of their loan and work out a payment plan. They might even be granted a deferment or forbearance, but they can't simply put off paying forever. If default goes on for too long, the lender will start the foreclosure process, and the borrower can lose the home. On the other hand, if you catch up on your payments, your mortgage is considered reinstated.

Because so much is at stake when it comes to a mortgage, it's especially important to understand exactly what you can afford. It’s just as important to keep in contact with your lender and let them know of any financial hardships you’re experiencing before you start missing payments.

Unsecured loan

Because unsecured loans don’t have collateral, you won’t risk losing a particular thing such as a home or car if you don’t pay. However, there are still consequences. Your lender will take an alternative route that might include:

• Notifying credit reporting agencies about your late payments
• Sending your account to collections
• Filing a lawsuit against you
• Garnishing income or Social Security payments (in the case of federal student loans)

While these might not seem like a big deal compared to losing a home, they can damage your credit and make it much harder for you to eventually buy a home or take out other loans in the future.

The bottom line: What secured debt means for borrowers

Because you put your house up for collateral when you take out a mortgage, home loans are secured debt. This means that the lender can legally seize your property if you stop making payments on the loan. Therefore, it’s very important to stay on top of your mortgage payments.

One way to make sure you don’t buy more house than you can pay back is to get preapproved for a mortgage to see what you can afford. You can start the preapproval process with Rocket Mortgage today.

Refinancing may increase finance charges over the life of the loan.