Mortgage vs Personal Loan: Which Is Better for You?

Deciding between a mortgage and a personal loan can be tricky. Both allow you to borrow a lump sum of money upfront and pay it back over time But they work differently and have different use cases.

I’ll compare mortgages and personal loans in this article, so you can weigh the pros and cons of each. I’ll also offer tips on deciding which type of loan is right for your needs.

What Is a Mortgage?

A mortgage is a loan used specifically to finance real estate. The property you purchase acts as collateral for the loan.

Common uses of mortgage loans include:

• Buying a house
• Buying land to build on
• Buying a condo or townhome
• Buying a multifamily property like a duplex or fourplex

Mortgages allow you to buy a more expensive property than you could afford with cash alone. A standard mortgage term is 30 years, giving you 3 decades to pay back the loan.

Mortgages can also have 15, 20, or 25-year terms if you want to pay them off faster. The most popular types of mortgages are fixed-rate and adjustable-rate.

With a fixed-rate mortgage, your interest rate stays the same for the full loan term. An adjustable-rate mortgage starts with one rate for a set period, then can fluctuate year to year.

What Is a Personal Loan?

A personal loan provides a lump sum of cash that you repay over 1 to 7 years in most cases. These loans are unsecured, meaning you don’t have to put up an asset like your home as collateral.

Personal loans have more flexible uses than mortgages. Common uses include:

• Paying off high-interest debt
• Funding home improvements
• Paying medical bills
• Financing a vacation
• Covering emergency expenses
• Making a major purchase
• Starting a business

Interest rates on personal loans range from about 3% to 36%, depending on your credit score and other factors. With good credit, you can likely qualify for a rate under 10%.

Key Differences Between Mortgages and Personal Loans

Now that you know the basics, let’s compare mortgages and personal loans across a few key factors:

Purpose

The main difference is that mortgages can only be used to buy real estate. Personal loans can fund any legal purpose.

Amount You Can Borrow

Mortgages allow you to borrow much more, often between $50,000 and $750,000. Personal loans top out around $100,000 for some borrowers.

Interest Rates

Mortgage rates currently average around 7%, while personal loan rates average 10% to 28%. However, this varies based on your credit score and other qualifications.

Loan Term

Most mortgages have 15 to 30-year terms. Personal loans usually need to be paid off in 1 to 7 years.

Monthly Payments

Because you’re paying mortgages off over decades, the monthly payments are lower than a short-term personal loan.

Collateral

Mortgages use the purchased property as collateral if you default. Personal loans are typically unsecured.

Fees

Closing costs for mortgages often reach the thousands. Personal loans may or may not have origination fees.

Credit Requirements

You can get a mortgage with a credit score as low as 580 in some cases, though 620 is preferable. Personal loans often require a score over 640.

Funding Time

Personal loans can be funded in days if you qualify and provide documentation quickly. Mortgages take around 45 days on average.

When Is a Mortgage the Right Choice?

As you can see, mortgages and personal loans have significant differences. So when might a mortgage be the better loan option?

If you need to finance real estate, a mortgage is your only option. Personal loans cannot legally be used for this purpose.

If you need to borrow a large amount, like over $100,000, a mortgage is preferable because personal loan limits top out around there.

If you want to lock in a low, fixed rate for decades, a fixed-rate mortgage allows this. Personal loans have higher rates that adjust as prime rates change.

If you need a longer repayment timeline, such as 15 to 30 years, only a mortgage will provide this. It makes homebuying feasible for most people.

If you expect your income to rise over time, a mortgage gives you a chance to lock in a payment you can afford later as your earnings grow.

If you can put down a 10% to 20% down payment, you may qualify for the best mortgage rates, making this option extra appealing.

When Might a Personal Loan Be the Better Choice?

Alternatively, here are some instances when a personal loan could beat out a mortgage:

If you need money for any purpose besides real estate, a personal loan is your only option. Mortgages can only be used to buy qualified residential or commercial property.

If you need less than $50,000, personal loan limits might accommodate you better, even if you have excellent credit.

If you want flexible repayment terms, personal loans allow you to choose terms as short as 1 year or as long as 7 years usually.

If you want funds quickly, personal loans can be approved and funded within days, while mortgages take weeks.

If you don’t want to tie up your home as collateral, personal loans don’t put your property at risk like mortgages.

If you have credit challenges, it may be easier to qualify for a personal loan than a mortgage. Lenders are often more flexible on personal loans.

If you don’t want to pay closing costs, personal loans don’t have all the fees mortgages do.

Tips for Getting the Best Loan for You

If you’re trying to decide between taking out a mortgage or personal loan, keep these tips in mind:

• Check your credit score to see what loan types you may qualify for and at what rates
• Make a budget to determine how much you can afford to borrow and repay monthly
• Calculate total costs for each loan using an online calculator, including interest and fees
• Shop and compare rates from multiple trusted lenders, banks, and credit unions
• Consider alternatives like a HELOC, cash-out refinance, or borrowing from your 401(k)
• Understand the risks – mortgages put your home on the line while personal loans don’t
• Know your rights as a borrower and read all agreements carefully before signing

The right loan comes down to your financial situation, needs, and goals. But following these tips will help you make an informed, wise decision.

Frequently Asked Questions About Mortgages vs. Personal Loans

Can you pay off a mortgage early?

Yes, most mortgages allow you to pay extra each month or make a lump sum payment to pay down the principal faster. This saves on interest costs over time. Some loans charge prepayment penalties, so check your agreement.

What credit score do you need for a personal loan?

Each lender is different, but you typically need a score of at least 640 to 670 for the best personal loan rates. Scores under 600 will make approval difficult. Shopping with a cosigner can help if your score is on the lower end.

Is mortgage interest tax deductible?

Yes, you may be able to deduct mortgage interest on an income-generating property or a primary residence when filing taxes. This deduction can save homeowners thousands per year.

Can personal loans be used for down payment?

No, personal loan funds cannot legally be used for a home down payment. Lenders want to see you invested your own money in the property. Mortgage fraud laws prohibit personal loan down payments.

Can you get a mortgage after bankruptcy/foreclosure?

Yes, but you’ll need to wait 1 to 4 years usually and show good credit since the event. An FHA mortgage is a good option for buyers rebuilding credit after financial struggles.

The Bottom Line

When deciding between a mortgage and personal loan, consider your budget, credit qualifications, timeline, loan purpose and down payment funds. While a mortgage is best for buying a home, personal loans offer more flexibility for other borrowing needs.