Is A Mortgage Secured Or Unsecured Debt?

Loans generally fit into either the "secured" or "unsecured" category. But what exactly is secured versus unsecured debt? And is a mortgage a secured or unsecured loan?

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. It can also affect how you fulfill your financial obligations as a borrower.

Is A Home Loan Secured Or Unsecured Debt?

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

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

What About Home Equity Loans And Home Refinances?

A home equity loan is a type of loan that enables you to access your home equity to borrow money. They’re often called second mortgages because you make two loan payments – 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 you put your home up for collateral in both instances.

Secured Vs. Unsecured Debt: How They Differ

We’ve already touched on what secured debt is, but let’s take a closer look at the definition of secured debt and how it differs from unsecured debt.

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 secured loan. A lender has a lien on this asset. That means they have the legal right to seize and sell your collateral to pay back the loan if you don’t make your monthly payments. The lien stays in full force until you fully repay your loan.

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 your agreement to repay your loan. As a result, you often will need to meet stricter requirements to qualify for an unsecured loan.

Credit Score Requirements

Unsecured loans typically have more stringent credit score requirements for borrowers because of the risk to the lender. 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 a lender will be able to offer you the lowest rates.

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.

Interest Rate

Your interest rate is the rate charged to you as a percentage of the principal, or original amount, of your loan. Essentially, it’s a fee that lenders charge borrowers for letting them borrow money. Because of the additional risk associated with unsecured loans, they often come with higher interest rates than secured loans.

Loan Limits

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 2024 is $766,550.

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

Repayment Terms

The term "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.

What Happens When You Can’t Pay Off A 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 property owner. They will try to sell the property for enough money to pay off the outstanding loan amount plus costs of foreclosing and selling the property.

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.

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. While this process doesn’t result in the loss of any assets for the borrower, it can hurt your credit score and make getting a loan in the future even harder.

FAQs On Secured Vs. Unsecured Debt

For more information on secured and unsecured loans, check out some frequently asked questions below.

Are interest rates lower on secured or unsecured debt?

Interest rates are generally lower on secured loans because the lender assumes less risk for a secured loan. In fact, it’s often easier to qualify for a secured loan than an unsecured loan because of the amount of risk involved.

How do I know if my loan is secured or unsecured?

If you had to put up collateral for your loan, such as your house for a mortgage, then your loan is secured. If you didn’t have to put up any assets as collateral, then your loan is likely unsecured.

What is an unsecured loan example?

Personal loans and student loans are both examples of unsecured loans. In both of these cases, borrowers aren’t required to present any collateral to qualify for the loan.

The Bottom Line

Mortgages are secured loans. That means that they’re backed by collateral the lender can collect if the borrower defaults on the loan – in this case, the house. There are also unsecured loans, which don’t require borrowers to provide assets as collateral.

Comparatively, secured loans offer more lenient qualifications and lower interest rates because they’re less risky for lenders than unsecured loans.

Are you ready to start the home buying process? Start an application for an initial mortgage approval online today.