What Can I Use As Equity On A Mortgage?

What can I use as equity on a mortgage? Collateral on a home mortgage loan is your primary residence. Applying for a mortgage is a straightforward process, but it requires valuable assets to be held as security...

Applying for a mortgage is a straightforward process, but it requires valuable assets to be held as security for the loan. The borrower may ask what it is that he can use as equity on the mortgage. "When you say equity, I am thinking of collateral," says Stephen Edwards of Waterfield Financial Company, the nation's largest privately owned mortgage company.


"Basically, the mortgage is to be secured by your property with improvements." Following that train of thought, Edwards clarifies that the "improvements are basically dwelling structures of some sort." Essentially, the land, the home, and any other buildings on the property, such as in-law suites, garages, barns, pool houses, or sheds, are used as collateral to secure the mortgage loan.




"Some lenders offer short-term mortgages for vacant land, and people buy land quite frequently," says Edwards. "They pay on the land, and a year or two down the road, they build a house on it." The value of the property increases proportionally to the value of the home that is built upon the land.

Collateral is the term used to define property that is used to secure the loan or debt. If the debt goes into default and is not repaid, the collateral will be seized and sold to repay the loan in full. In the case of a mortgage loan that goes bad, or which falls into default due to nonpayment of the monthly mortgage payments, a foreclosure takes place. The property is repossessed by the lender and sold in order to recoup the total amount of money that is due to the lender.

Equity, on the other hand, is the monetary difference between the collective balance of all outstanding loans held by the homeowner and the current market value of the home or property. For example, if the current market value of the home is $300,000 and the collective balance of all outstanding loans is $125,000, then the equity of the home is $175,000. If the market value of your home increases during the time that you own it, then, the home's equity has increased simply by existing.

Equity can also be looked at as the amount of the home that you actually own. Generally, the monetary amount of your down payment and the total amount of money paid into the principal portion of the loan that you are repaying, are thought of as the equity that has been built up in the home.

In most cases, the borrower places only a minimal down payment on the property being mortgaged. Therefore, the equity in the home is minimal, and the property and any improvements are used as collateral to secure the debt. Likewise, larger down payments will usually get the borrower a better mortgage rate, because the amount of equity that the home is starting with is greater.

Edwards sums it up, "Mortgages can be secured by a primary residence, which is where you live, or a secondary residence, which may be a vacation home." Essentially, the property that you are acquiring is used as collateral for the mortgage loan.

© High Speed Ventures 2011