Home Loan Rate

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What Home Loan Rate means to the home buyer?

Here's another email we received recently from a consumer that needs clarification on the reason why a home loan rate can be so good.

Can you help clarify something for me?

I've got into a bit of financial difficulty lately and really need to consolidate my debt. I've been having a look around and noticed that the home loan rate for an equity loan or a home equity line of credit is much less than the interest rate on a consumer loan. What's the catch?

Thanks

Hank

Our response:

Thank you so much for your email. This should be any easy one to clear up! A home loan rate for something like an equity loan will be much less than an interest rate on a consumer loan.

Why is that?

A home loan is a secured loan. This means that the loan is secured against your home as collateral. If you default on the loan the lender has the right to take your home to recoup its losses. This means that a home loan is less of a risk than an unsecured loan such as a consumer loan, hence the reason why you get a good home loan rate.

Of course, you have to own a home to be able to qualify for a home loan rate. You also need to have equity in this property for the lender to secure the loan against. If you have negative equity then they won't lend you money!

Something else to think about is that if you are having financial difficulties at the moment, this may have affected your credit score. If you have a bad credit history then you may not be able to obtain the best home loan rate, as this will be taken into consideration when you apply for the loan. If the home loan lender does not reject your application, they may increase the interest rate on the home loan. This interest rate could still be substantially lower than that of a consumer loan or any other type of unsecured loan.