People tend to use the terms “loan” and “home mortgage” interchangeably in casual conversation, but they have several key differences.
If you are preparing to purchase a home, understanding the intricacies of a mortgage can be overwhelming, but we are here to help.
Continue reading to understand the difference between a loan and a mortgage and how they work together.
Loans and Mortgages are Closely Intertwined
The reason home loans and mortgages are often used interchangeably is because of how closely they work together. To understand their role in the home buying process, you must clarify the difference between the two terms.
What is a Loan?
There are many types of loans, many of which you have probably heard of before. Some of the most common ones include:
- Personal loans
- Student loans
- Auto loans
- Small business loans
- Home-equity lines of credit
- Credit cards
- Credit card cash advances
- Mortgages
A loan is any type of money offered from a lender to a borrower. The borrower is liable to pay toward the debt until it is repaid in full. There is usually interest assessed throughout the duration of the loan.
What is a Mortgage?
As mentioned above, a home mortgage is a specific type of loan. Mortgages are intended to help you finance the purchase of a home through a bank or lender. When you take out a mortgage, you promise to repay the debt using your home as collateral.
Key Differences Between Loans and Mortgages
There are four key factors of loans and mortgages that differentiate the two.
1. Uses
Each type of loan has certain allowances that the funds may be used for. For example, a student loan can only be used for costs related to education. Some loans have more flexibility than others, such as a credit card. Mortgages, on the other hand, can only be used for the purchase of a piece of property, and no other type of loan can act in its place.
2. Collateral
Collateral is an asset that protects lenders. If a borrower fails to pay a loan, the lender is entitled to collect the asset. Each type of loan utilizes collateral differently. Here are examples of some of the most common types:
- Home equity
- Personal vehicles
- Paychecks
- Cash or savings accounts
- Investment accounts
- Paper investments
- Fine art, jewelry, or collectibles
- For a mortgage, the collateral is the real estate itself.
3. Requirements
Requirements for a loan vary depending on the lender and the type of loan. Common factors that financial institutions consider are credit score, income level, and down payment amount. Mortgages have the most specifications, including:
- 10-20 percent down payment
- High credit score
- A steady source of income
- Time on job
- Debt to income ratio of 50 percent or less
- Occupancy
- Obtaining mortgage insurance
4. Features
Some other typical features the differentiate a mortgage and other loan varieties include:
- Loan term
- Interest rates
- Closing costs
- Monthly payment inclusions (such as homeowners’ insurance and property taxes for a mortgage)
Sell Your Home Quickly with Agape Home Buyers
If you are looking to drop your home mortgage and sell your house quickly, Agape Home Buyers is here for you. We buy houses all across Florida in places like Gainesville, Ocala, Daytona Beach, DeLand, Deltona, Orlando, Cocoa, Boca Raton, Tampa, Bradenton, and everywhere in between. Regardless of the price or condition, we would love to work with you.
Reach out to get an all-cash offer today!