If you ever owned a car or your own home, you are probably familiar with liens. Homeowners may have liens placed on their property for a variety of reasons. For example, houses purchased through conventional bank financing will have a mortgage lien or a deed of trust. Many liens are voluntarily placed on real estate such as the mortgage lien just discussed.
A lien is a type of legal right or security interest a creditor has against real estate to secure payment on an underlying obligation. For example, if you take out a home equity loan to finish your basement, your bank will usually require you to give a lien on your property to guarantee it gets paid. If you fail to pay the home equity loan, the bank will have a right to foreclose and sell the house to pay off the loan.
A voluntary lien -- also called a consensual lien -- is just a lien placed on property with your consent. You voluntarily agree to a lien when you offer your property as collateral in your loan agreement and execute either a mortgage or a deed of trust that grants a lender a security interest in the property. Beware of cross-collateralization clauses, which grant lenders the right to use your real estate not only as security for the loan you are taking out, but for other present and future loans you take out with that same lender.
Types of Voluntary Liens
Voluntary liens are used for many different purposes. As discussed above, mortgage liens and home equity loans are common voluntary liens. A lien imposed for a home equity line of credit -- a HELOC -- is also a voluntary lien. Farmers often will pledge crops grown on their farms or give a mortgage on the farm to secure financing for seed and farming operations. Small business owners may use their personal residences to secure business loans.
Considerations When Granting Voluntary Liens
Giving voluntary liens has some advantages and disadvantages. Offering collateral to secure financing may help you not only obtain credit, but also obtain credit at a cheaper interest rate because the lender's risk is lower. On the other hand, home equity is often the largest asset a person possesses. Placing liens on your property will eat up that equity and leave you with less flexibility in obtaining financing in the future and may adversely affect your credit rating. Consent to liens only after giving the consequences serious thought.
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