Is A Mortgage Secured Or Unsecured Debt?

In general, loans fit into either the "secured" or "unsecured" category. But what exactly is secured vs. unsecured debt? And is a mortgage secured or unsecured debt?

It's a good idea to understand the differences between these two types of debt because it can have a major impact on the loans you choose and how you fulfill your financial obligations as a borrower.

Secured debt is backed by collateral, or assets that you have in your possession. Mortgages, home equity lines of credit, home equity loans and auto loans are four examples of secured loans. Put simply, your lender will ask you what type of collateral you'll "offer up" to back the loan. It's a great incentive to encourage you to make your payments.

Unsecured debt, on the other hand, is not backed by collateral. Examples of unsecured debt include personal loans, credit cards and student loans.

Collateral

As a borrower, collateral is an asset or property that you offer to your lender as security for a loan. A lender has a lien on this asset, which means they have the legal right to seize and sell your collateral to pay back the loan if you do not fulfill your obligations as a borrower (i.e., if you do not make your monthly payments). The lien stays in full force until you fully repay your loan.

A foreclosure stays on your credit report for 7 years from the date of your first missed mortgage payment that led to the foreclosure. Unfortunately, it can be detrimental to your credit.

Risk Level

A lender considers an unsecured loan riskier than a secured loan because they can only rely on a check of your credit score and the fact that you've agreed to repay your loan. As a result, to qualify for an unsecured loan, you often must have a higher credit score and often must accept a higher interest rate to qualify.

Your credit score is a three-digit number that proves how consistently you've paid back debt in the past and how well you currently handle debt. Credit scores range from 300 – 850. The higher your score, the more likely it is that a lender will want to work with you.

Your interest rate is the rate charged to you as a percentage of the principal, or original amount, of your loan.

Requirements

Unsecured loans typically have more stringent requirements for borrowers because of the risk to the lender. This means it's usually harder to qualify for an unsecured loan, but that also does depend on individual borrowers' qualifications. However, it's worth noting that if you're trying to rebuild your credit or have a lower credit score than you'd like, you may have an easier time getting a secured loan.

Loan Limits And Terms

Which loans – secured loans or unsecured loans – typically have higher loan limits and repayment terms?

First of all, let's discuss what "loan limits" means. The Federal Housing Finance Agency (FHFA) determines the "ceiling" for home loan limits each year. These are called the "conforming loan limits," and they are a dollar cap on what Fannie Mae and Freddie Mac will guarantee or buy. Fannie Mae and Freddie Mac purchase mortgages so lenders are free to do what they do best – lend mortgages to borrowers. The baseline conforming loan limit for 2022 is $647,200.

A secured loan will typically offer higher loan limits than an unsecured loan due to the nature of less risk and collateral offered up to the lender.

"Repayment terms" refers to how you pay back a loan in accordance with the loan's terms. Your repayment terms may be more flexible with an unsecured loan compared to a secured loan.

Is a mortgage secured or unsecured debt?

Mortgages are "secured loans" because the house is used as collateral, meaning if you’re unable to repay the loan, the home may go into foreclosure by the lender. In contrast, an unsecured loan isn’t protected by collateral and is therefore higher risk to the lender.

In the same vein, second mortgages are considered secured debt, which means that they have collateral behind them (your home).

What About Home Equity Loans And Home Refinances?

A home equity loan is a type of loan that enables you to tap into the equity of your home to borrow money. They are often called second mortgages because you have two loan payments to make – your original payment and your second mortgage payment on top of that.

A home refinance means you get a new home loan with different terms. For example, you might swap out your 30-year mortgage for a 15-year one. You might also decide to go for a lower interest rate.

We mentioned earlier that home equity loans and home refinances are considered secured loans. They are both secured loans because in both instances, you put your home up for collateral.

Interest rates are generally lower on secured loans because the lender inherently assumes less risk for a secured loan.

If you can't pay off your home loan, what actions will your lender take?

Secured Loan

If you have too many delinquent payments with a secured loan, your lender will file a notice of default on your property.

A homeowner can take advantage of time to work out a payment plan with the lender before they get to the foreclosure stage. However, after too many missed payments, the bank will become the owner and will try to sell the property for an amount necessary to pay off the outstanding loan amount as well as costs associated with the foreclosure and sale of the property.

Unsecured Loan

Since unsecured loans don't require collateral, the lender has to take an alternative recourse. They have the right to report your delinquent payments to the credit reporting agencies, file a lawsuit against you or send your account to collections.

If you think you can't make payments for a secured loan, it's a good idea to talk to your lender before you think you'll run into trouble.

Mortgage secured or unsecured: Which should you opt for? It's a good idea to weigh the pros and cons of both options before you make a decision. It may seem risky to put your house on the line with a secured loan, but remember that you might not be able to get quite as large of a loan with an unsecured mortgage. Your interest rate might be higher as well.

In addition to collateral, you'll also want to examine a few other angles: Risk level, requirements, loan limits and terms and interest rates. Finally, you'll also need to consider the results of not being able to make your payments.

Should you pay off debt or save for a mortgage? Read more to weigh the pros and cons.