If you need to borrow money, you can put your house up as collateral. Taking out a second mortgage or an equity line of credit are ways to collateralize your house. When you do this, though, you're taking the risk of losing your house if you don't pay back the loan. If this risk is acceptable to you, you'll need to prove that the house is yours to collateralize, and you'll need to give the lender a collateral interest in it.
The first step in collateralizing your home is establishing that you own it. While each lender may have its own process, being able to show that you hold the deed to your home should usually be adequate. Some lenders may also want you to provide them with a title policy that insures their interest in your home against any previous owner coming forward and claiming that he still has a right to it. You may also need to establish that you're fulfilling your responsibilities to the house by providing statements for your insurance, property tax and mortgage that all show that you're paying them on time.
Before the lender can consider your home as collateral, it may want to know how much value is in your house. To this end, you may need to provide an appraisal report or to pay for the lender to get one. In an appraisal, an independent third party visits your home and writes a report to explain what he thinks your property is worth. For the purposes of the loan, the value of your collateral is equal to your appraised value, reduced by your mortgage balance.
Collateralizing the Home
To actually collateralize the home, you'll need to give the lender the right to take it if you don't pay your loan. Usually, you do this by signing a mortgage or, in some states, a deed of trust. These documents give the bank the right to step in and assume the title to the house if you don't make your loan payments. You will also usually sign a loan agreement, sometimes called a promissory note, that contains your commitment to pay the lender back.
Alternative Loan Structures
If this process sounds strangely like getting a mortgage, it's because that's what you're doing. With this in mind, instead of pledging your home for a loan, you may get a better deal if you take out a cash-out refinance, a second mortgage or an equity line of credit. On the other hand, if you'd like to borrow money without having to put your house at risk, a personal loan that is either unsecured or that is secured by a different asset could be a better choice for you.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.