Why Does Homeownership Affect Interest Rate?

The incidence of homeownership on interest rate is mainly related to the risk involved in the financial transaction. Homeownership modifies the risk involved for the lender on the lending process in several different ways and consequently, the interest rate is modified because it depends on the risk associated with the transaction.

Risk Modifier

Homeownership implies that the applicant has been able to save enough money to purchase a property or at least that he manages finances good enough to maintain a property. This shows the lender payment capacity and a correct financial conduct and thus boosts the applicant’s chances of approval. The psychological risk that affects the lender is reduced due to this perception.

But also, the possession of a property, even if it is not used as collateral of a loan, still guarantees repayment one way or another. This is due to the fact that all of the borrower’s assets work as a guarantee of any debt as the lender can always take legal action to claim his money and if the borrower fails to repay the loan, the judge may rule the sell of any asset to repay the debt.

Though such legal processes would take a longer period of time than the simple action of repossession for which secured loan lenders are entitled, someone taking an unsecured loan is still risking his assets if he fails to repay his debt.

Thus, homeownership reduces the economic risk on any transaction since the assets work like a guarantee of all the applicant’s debt regardless if they are used as collateral of any particular loan or not. This risk reduction will translate into improvements on the loan terms and on softer requirements for loan approval.

Interest Rate

Due to this risk reduction that homeownership implies, the interest rate on any loan type that a borrower owning a property applies for, will be significantly lower than those for non homeowners. This is regardless of whether the asset is used as collateral for the loan or not. However, if the property is used as security of the loan, the interest rate will be even lower as it provides an additional guarantee for repayment.

This implies that a homeowner will get better rates on unsecured loans, car loans, student loans and many other non property related loans. Moreover, the interest rate won’t be the only loan term improved by homeownership. Homeowners can get better loan amounts, longer repayment programs and thus, lower monthly payments. And besides, approval for homeowners is a lot easier and the process significantly shorter because the lender is more confident on lending to a homeowner than to a non homeowner and thus, there are fewer things to check when it comes the time to consider approval or decline for the loan.

Mary Wise, a professional consultant at Badcreditloanservices.com with twenty years in the financial field, prevents consumers from falling into the hands of fraudulent lenders. In her website you will find more useful tips and interesting financial articles on this and many other related topics.