At some point, you might find yourself looking to get a loan. In general, a personal loan is more flexible, in that it can be used for a variety of purposes, while a mortgage is used solely to buy real estate.
Loans and mortgages are common financial tools that many people utilize, but what exactly sets them apart? While they share some similarities, there are key differences between a mortgage and a loan that you should understand before applying for either.
A Brief Overview
First, let’s start with a quick rundown:
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A loan is borrowed money that is repaid over time, usually with interest Loans can be used for many purposes like funding a business, paying tuition, consolidating debt, covering medical costs, and more
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A mortgage is a specific type of loan used for purchasing real estate. The property serves as collateral for the loan, meaning it can be seized if the borrower defaults.
So in short, all mortgages are loans, but not all loans are mortgages. Now let’s explore their differences in more detail.
Intended Use
One of the biggest differences between a mortgage and other loans comes down to intended use.
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Mortgages are exclusively used for financing real estate purchases. This includes buying a home, land, or commercial property.
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Loans have a much broader range of uses. Common uses for personal loans include consolidating high-interest debt, financing a large purchase, covering emergency expenses, making home improvements, paying medical bills, and more. Loans can also be obtained for business purposes like funding startup costs, expansions, and other capital investments.
Loan Amounts
Given their different purposes, mortgages and loans also differ quite a bit in the amounts borrowed:
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Mortgages typically range from $50,000 to over $1 million. The average mortgage recently reached a new high of around $410,000.
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Personal loans tend to be for smaller sums, usually from $1,000 up to $100,000. Average personal loan amounts fall between $10,000 to $15,000. Small business loans average around $20,000 to $100,000.
Collateral and Risk
One of the things that allows mortgages to offer such large loan amounts is the real estate collateral tied to the loan. If the borrower fails to repay the mortgage, the lender can seize the property through foreclosure to recoup losses.
Most other types of loans are unsecured, meaning they don’t require collateral. This increases the risk for lenders, which is why unsecured loan amounts are typically much lower than mortgages.
Exceptions are secured loans like auto and home equity loans that do require collateral. However, the asset offered as collateral is of lower value than real estate, so loan amounts are still comparatively smaller than mortgages.
Interest Rates
Interest rates can vary dramatically between mortgages and other loans:
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Mortgage rates currently average between 5% and 7% for a 30-year fixed-rate loan. Mortgages almost always have lower interest rates than other loan types.
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Personal loan rates can range from around 3% up to 36%, with averages falling between 10% and 15%. Rates are largely determined by creditworthiness.
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Small business loan rates also depend on credit factors but typically start around 7% to 8% and go up from there. Some specialty business loans like merchant cash advances can have rates of 50% or more.
Repayment Term Lengths
The repayment terms between mortgages and other loans are very different:
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Mortgages offer lengthy repayment terms of 10, 15, 20, or 30 years. This allows borrowers to spread repayment over decades to make mortgages affordable.
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Personal loans usually have much shorter terms of 1 to 7 years. Short terms limit lenders’ risk exposure with unsecured loans.
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Business loans vary depending on factors like loan type, amount, and collateral. Common terms range from several months up to 7 years. Some reach 10 years for very large sums. Merchant cash advances are repaid within months through daily deductions.
Application Process
Applying for a mortgage is a much more extensive, document-heavy process compared to other loans. Preapproval typically requires:
- Proof of income
- Bank statements
- Tax returns
- Credit reports
- Debt-to-income calculations
- Property appraisal
Many other loans can be applied for and approved online in minutes with minimal documents. However, secured loans and very large business loans still require financial documentation for approval.
Closing Costs
When a mortgage closes, the borrower must pay closing costs that average 3% to 6% of the total loan amount. These fees pay for processing, underwriting, appraisals, and more.
Closing costs aren’t charged with other types of loans. However, most personal and business loans include origination fees of 1% to 10% that are deducted from the approved loan amount before funds are dispersed.
Key Takeaways
While loans and mortgages are both borrowed money that is repaid over time with interest, there are important differences:
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Mortgages are a specific type of loan used only to finance real estate purchases, whereas other loans can fund a variety of needs.
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Mortgage amounts are significantly higher than personal and small business loan amounts.
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Mortgages use the purchased property as collateral. Most other loans are unsecured.
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Interest rates and repayment terms vary dramatically between mortgages and other loan products.
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Mortgage applications require extensive documentation while other loans offer quicker online approvals.
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Mortgages have closing costs while personal loans and some business loans charge origination fees.
Understanding these key differences allows you to decide which borrowing option best fits your particular needs and financial situation. Consult with a loan officer or advisor if you need help weighing your choices.
How to Get a Mortgage or a Personal Loan
In general, you’ll need to provide proof of identity and income to get a personal loan or a mortgage. Most lenders also require a credit check, where they will look at your credit history and view your credit score.
You can apply online for most mortgages and personal loans. However, you’ll generally need more paperwork and might have to meet other requirements for a mortgage. You may also need to show proof of a reserve or have a down payment for a mortgage. Additionally, you typically need to have an appraisal of the property so that the lender knows it’s worth at least as much as you’re borrowing. Other requirements like insurance and closing costs often come with mortgages.
Once you apply and provide documentation, you’ll find out whether you’re accepted, and the loan funds will be disbursed. Check with the lender ahead of time to find out what the requirements are so that you can finish the process faster.
Personal Loan vs. Mortgage: An Overview
Both personal loans and mortgages are types of debt. A lender provides you with funding upfront, and you repay the lender over time. In addition to repaying the money you borrowed (called the principal), you pay interest, which is the fee you pay for using the lender’s money to make your purchase.
Personal loans and mortgages are both installment loans, so you’ll know when you’ll be done repaying your debt. These payment schedules can have fixed or variable interest rates. With a fixed rate, you pay the same amount each month, as the interest payment doesn’t change. A variable rate, though, can change. This means that if interest rates rise, your minimum monthly payment will also increase to keep you on track to pay off the loan within the agreed-upon time frame.
Each type of loan might also come with various fees, including the possibility of an origination fee to process a loan application. When reviewing the loan terms, make sure you understand what taking on debt might cost you, regardless of whether you get a personal loan or a mortgage.
It’s important to note, however, that personal loans are usually (but not always) unsecured, so if you fail to make payments, the lenders main recourse is to sue you or send your account to collections. On the other hand, a mortgage is used to buy real estate, so if you can’t make payments, the lender can repossess the property and attempt to sell it to recover some of the money that they laid out.
Difference Between Loan And Mortgage – Difference Between Home Loan And Mortgage Loan
FAQ
Is a loan better than a mortgage?
Is a mortgage a loan?
Does a mortgage count as a loan?
What is the difference between a mortgage and a home loan?
What is the difference between a mortgage and a loan?
A loan is an amount of money that someone borrows and repays to a lender in installments over a period of time, with the borrower typically paying interest on top of the loan amount (as detailed in the borrower’s promissory note). A mortgage, or home loan, is a type of loan used to buy real estate, and it’s secured by the purchased land or house.
What is a mortgage & a personal loan?
A mortgage, or home loan, is a type of loan used to buy real estate, and it’s secured by the purchased land or house. Other loans, such as personal loans, aren’t restricted to real estate and can help finance various purchases or expenses for their borrowers.
What is a mortgage & how does it work?
Let’s start with the definition that explains what a mortgage is. A mortgage is a loan from a lender that gives borrowers the money they need to buy or refinance a home. The borrower agrees to pay back the lender with monthly mortgage payments that include principal, interest and other fees.
What is a mortgage loan backed by?
Mortgages are secured loans, and secured loans are backed by collateral. In the case of a mortgage, the collateral is the home. If a borrower falls behind on their loan payments or fails to meet other mortgage terms, the mortgage loan agreement gives a lender the right to repossess the home. How Does A Mortgage Loan Work?