Collateral
The asset pledged to secure a loan, which the lender can take and sell if the borrower defaults.
In a mortgage, the home itself is the collateral. The borrower owns it, but the lender holds a lien, a recorded legal claim, against the property until the loan is paid off. If the borrower stops paying, the lender's right to that collateral is what allows foreclosure to recover the unpaid balance.
Because the lender's risk is partly secured by the property, mortgage rates are dramatically lower than rates on unsecured debt like credit cards. The trade-off is that the lender's claim on the home survives even sale or bankruptcy until satisfied.
When you refinance, the new lender steps into the original lender's lien position. Second mortgages and HELOCs become subordinate liens, lower priority claims that get paid only after the first mortgage in any forced sale.
Related terms
Other terms you'll see alongside Collateral
A legal claim against property that secures a debt and must be paid off before clear title can transfer.
The legal process by which a lender takes possession of and sells a property after a borrower defaults on the mortgage.
The loan amount expressed as a percentage of the property's appraised value or purchase price (whichever is lower).
The act of placing or moving a lien into a lower priority position relative to other liens on the same property.
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