Unencumbered Assets to Borrow and Cover Cash Outflows
Unencumbered refers to a real estate property or an asset that is free from liens and claims by financial institutions. Such assets are easily liquidated, sold, and transferred.
Examples of Assets
A car purchased using an unsecured loan is considered an unencumbered asset. The same is true for items bought in cash, whether equipment and machinery, office furniture, or anything else. A real estate property without a lien or mortgage is another example. Unlike it, a mortgage loan is a type of debt whereby the home serves as collateral. Other examples include shares bought in a cash account and securities that are not subject to legal claims by third parties.
Types of Encumbrances
There are many examples of financial and non-financial liabilities. The list includes servitudes, liens, security interests, and easements. Other examples real covenants, and wayleaves. A real covenant, for example, is a promise to use or not to use land for certain activities. A wayleave is the consent to use land owned by another party. It is a contract and license that grants rights in exchange for a payment, which can be made in installments or on an annual basis. There are similarities between easements and wayleaves when it comes to the provisions made. One party is allowed to use the property of another in exchange for a fee or another form of payment. There are other types of encumbrances such as structure alterations, encroachments, building orders, and charging orders.
Uses of Unencumbered Assets
Such assets can be used as collateral when applying for a mortgage or another secured loan. Borrowed securities also fall in this category because they can serve as collateral. This is possible in the context of repo transactions. However, such assets offer liquidity within a certain period – from borrowing to returning. Whether an asset is held to maturity or is available for sale is not important. While the asset cannot be sold, the holder can use it as collateral. In general, securities vary based on market depth, daily turnover, collateral markets, credit quality, and other factors. Financial institutions, for example, sell unencumbered assets to cover their cash outflows. Individual borrowers also sell their assets to pay debts or bills. They can use them as collateral for long- and short-term loans. Lenders face less risk and offer attractive interest rates and terms. Borrowers can use different types of real estate as collateral, and their principal residence is one option. They can use rental properties, cottages, second homes, or tracts of undeveloped land, depending on the type of loan.
Most borrowers look forward to the day when their loan would be paid off in full. Many homeowners organize mortgage-burning parties and set the mortgage on fire. There are some things to do, however, once the loan has been paid off. Borrowers are advised to contact their financial institution to ensure that they have satisfied the debt. In some cases, there are late charges for a missed payment or the funds are not sufficient to pay the insurance premium or taxes. Once the mortgage has been paid off, the financial institution will issue a document, which is referred to as a satisfaction of mortgage. It serves to verify that the debt is satisfied. Homeowners who use their property as collateral need this document. Subsequent creditors will not close without it, and in some cases, borrowers have to sue financial institutions to prove that the loan has been paid off in full.
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