Definition
Collateral is an asset that is pledged to a lender to secure a loan. For a mortgage, the home itself serves as collateral, meaning the lender can seize the property if you fail to make payments.
Understanding Collateral in Mortgages
Collateral comes into play when you apply for a mortgage. It is the property itself that secures the loan. In simple terms, if a borrower can't repay the loan, the lender can take the home to recover the funds. Example: If you borrow $200,000 to buy a home, the house is the collateral. It's not just a formality; it's a crucial part of the loan agreement. A common misconception is that collateral means automatic loan approval. It doesn't guarantee approval but is essential for the loan process.
