Difference of Loan and Mortgage

College of Real Estate CORE Difference of Loan and Mortgage

Mortgage and loan often get interchanged in the banking world. Loans are typically like lending deals; people find them similar in nature to any other type of mortgage. So, is a loan different from a mortgage? Confused with the difference between these two?

Luckily for you, CORE Member, we’ve prepared all the things you need to know when it comes to the difference between Loan and Mortgage. Remember, that while the first step is completing any of these amazing courses, the second and possibly more important step is taking action even if it’s imperfect action.

 

Mortgages are loans that are secured with real estate or personal property.

College of Real Estate CORE Difference of Loan and Mortgage AgreementA mortgage is a financial deal usually through which one pays the funds back in monthly payments over a given period of time. A loan, on the other hand, needs to be returned at one point in time by using its principal sum or all accrued interest gained as repayment. The main difference between a mortgage and a loan is that the former needs an investment in the property while the latter doesn’t.

Loans are a communication between a lender and borrower. The creditor is also known as the lender and the debtor is called the borrower. Money lent and received in this transaction is known as a loan: the creditor lends out money, while the borrower takes out a loan. The amount of money originally borrowed is called the principal. The borrower pays back not just the principal but also additional fees, typically monthly installments and for a predetermined duration. Traditionally, banks would take in deposits, use them to issue loans, effectively making loans efficient within an economy. Loans can be utilized by individuals or external entities such as governments.

As one of the most well-known types, a mortgage is secured loans that are specifically tied to real estate property. In order to access the funds, the borrower will have to make monthly payments to repay an amount that goes towards the value of the property and is equivalent to what would be paid in a lump sum upfront. The property belongs to the taxpayer once the debt has been repaid in full. Mortgages also protect creditors from losing their money in case a debtor misses a payment. If this behavior continues, for example, their house can be foreclosed upon so that lenders can finally recoup losses from the borrower

 

Now, let’s compare the two. 

There is a relationship between a lender and borrower. When the borrower defaults on the loan, the creditor is then also referred as a Creditor or Lender. Money lent and received in this transaction is known as a loan: the creditor has “loaned out” money while the borrower has “taken out” a loan.

Mortgages are loans that secure your real estate property with a certain interest rate or annual percentage rate, according to the loan agreement. These lenders then pay you in installments over time, and you don’t own the property.

When it comes to types, types of mortgage are Fixed-rate mortgages, FHA mortgage loans, adjustable rate mortgages, VA loan mortgages, interest-only mortgages, reverse mortgages.

 

While types of loans are Open-end and closed-end loans, unsecured and secured loans, student loans, mortgage loans, payday loans.

Now, let’s talk about its financial and legal definition.

College of Real Estate CORE Difference of Loan and Mortgage Couple 2Some financial transactions are made between individuals, groups, or businesses with the understanding that one will pay back an amount of money with interest to another. For instance, banks can often loan money to people who have good credit problems and need a car or home or start a business. People usually repay that loan over a given number of months/payments/time. It’s also possible for individuals to lend small portions of their money to numerous others through peer-to-peer lending services like Lending Club. And it is common for one individual to lend another person small portions of their money on smaller purchases.

The legal status of loans varies on the basis of different types of loans and loan agreements, such as a mortgage loan and those found in the Uniform Commercial Code. These contracts are judged according to contract law and enforceable according to the Uniform Commercial Code, which details loan terms, repayment terms, interest rates, ramifications for missed payments, and default. Federal legislation is intended to protect creditors and debtors from financial harm.

However, many people still borrow and lend without formalizing their contracts on small scales. Having a written agreement makes it easier to settle disputes fairly, as oral contracts have more loopholes and are less likely to be held accountable.

There are various terms commonly used in discussions about loans and mortgages. Knowing these terms does not necessarily make borrowing or lending easier, but it will help you make the most out of the options available.

  • Principal

The principal is the amount borrowed minus any interest. For example, if someone owes $5,000 and has repaid $3,000 so the principal is $2,000. It does not take into account any interest that might be due to the borrower on top of the remaining $2,000 owing.

  • Interest 

Interest is when a creditor charges a debtor to borrow money. Interest payments make it worth the risk for creditors, as they expect to earn back all their money lent plus more than that.

  • Interest Rate

Interest is what a loan is paid every month. When interest rates are higher, less of the principal is repaid with interest within a certain time. Conversely, when interest rates are lower, more of the principal is repaid with interest within a certain time.

  • Pre-qualified

Pre-qualification tells a loan company that you have a decent credit score and that you are likely to be approved for a loan.

  • Pre- approval

A pre-approval is used as the first step of a formal loan application. Pre-approvals are used to verify your credit and income, and lenders look for other information about you before deciding whether to hand over your loan or not. More information about pre-approval and pre-qualification.

  • Prepayment

Some lenders will penalize you for paying the principal upfront, as interest may no longer be generated on that loan. The lender would have been able to make more money if you had taken the loan out for a longer period of time and paid interest over time.

  • Down Payment

Putting up a down payment is a way for people to pay for something upfront and put the full cost on themselves and pay it back over time with interest. If a loan costs $213,000 and you are offered to pay 20% in today’s cash, then you would have $42,600 in savings. The loan would cover the remaining costs and be paid back with interest over time.

  • Annual Percentage Rate (APR)

An annual rate that includes all the fees over the course of a year for a loan. APR or Interest Rate is stated as an annual percentage and APR vs. APY calculates the true annual amount.

  • Private Mortgage Insurance (PMI)

Borrowers that use either an FHA loan or a loan with a down-payment of 20% or less may be required to buy mortgage insurance, which protects the borrower’s ability to make mortgage payments. PMI premiums are paid monthly and usually bundled with the monthly mortgage payments.

  • Foreclosure

The legal right and process that lenders use to recoup financial losses incurred from a borrower failing to repay a loan. Usually results in the public auction of an asset and the proceeds go toward the mortgage debt.

  • Lien

A lien gives a lender legal ownership over a property or asset, should the borrower default on loan repayments.

 

Now, let’s talk about the types of loan. 

  • The Difference Between Closed-End vs. Open-End Loans

College of Real Estate CORE Difference of Loan and Mortgage CoupleThere are two different forms of loan credit: open-end credit, which allows loans to be taken out again, and close-end credit, which cannot be borrowed more than once. The most commonly used type of open-end credit is a credit card; someone with a $5,000 limit on the card can borrow that amount as long as payments are made and the limit is never reached. Whenever she spends the balance down to zero dollars, she has the original $5,000 available to use.

Loans with the lender making the determination of when the debt will be repaid typically fall under closed-ended loans; they also are known as term loans. If a person with a mortgage loan of $150,000 has paid back a total of $70,000 to his lender, it does not mean that he still has $70,000 remaining out of $150,000; rather he has simply made progress on paying back what’s owed. If more cash is needed, he will have to apply for another loan.

Loans with the lender making the determination of when the debt will be repaid typically fall under closed-ended loans; they also are known as term loans. If a person with a mortgage loan of $150,000 has paid back a total of $70,000 to his lender, it does not mean that he still has $70,000 remaining out of $150,000; rather he has simply made progress on paying back what’s owed. If more cash is needed, he will have to apply for another loan.

 

  • Secured vs. Unsecured

College of Real Estate CORE Difference of Loan and Mortgage Loan 1Loans can be either secured or unsecured. For example, an unsecured loan cannot have a lien placed on the borrower’s assets. With an unsecured loan, credit decisions are based solely on a borrower’s income and credit score, which is indicative of their risk profile. Unsecured loans may not have as much credit available as secured loans and thus often have higher APR. There are many other types of unsecured loans such as overdrafts, bank cards, and personal loans.

Secured loans, also called collateral loans, are connected to assets and relate to things like mortgages and auto loans. They offer low rates of interest as well as the ability for lenders to take control of an asset if a borrower defaults on his or her loan. Secured loans vary depending on the nature of their agreement and are typically safer investments for lenders. However, if someone defaults on his or her loan agreement, lenders may be able to seize partial or full control of the asset involved in the deal.

There are also other types of loan.

The broad categories of open-end and closed-end describe loans that have different qualities, including student loans (closed-end, often secured by the government), small business loans (closed-end, secured or unsecured), loans for U.S. veterans (closed-end, secured by the government), mortgages (closed-end, secured) and even payday loans (closed-end, unsecured). With regard to the latter type of loan – which should be avoided – payday loans usually reveal a very high APR which make repayment difficult or virtually impossible.

 

If there are types of loans, of course there are types of mortgage too but this time.

  • Fixed-Rate Mortgages

Most residential loan programs are fixed-rate loans, with a repayment period of either 25 to 50 years. These loans have a set interest rate that is not subject to changes and payments are made evenly over the length of the loan, before paying down the principal balances in addition to all interest payments.

 

  • FHA Mortgage Loans

The FHA makes mortgage loans, not the government. At most, they only insure a loan that an independent source, like a bank, made. There is a limit on how much the government will insure a loan. These loans are usually given to first-time homebuyers who are low- to moderate-income and/or have not received 20% down payments before; loans for those with poor credit history or history of bankruptcy can also be obtained. It is worth noting that though homeowners taking out private mortgage insurance can purchase homes with FHA loans, it is typically required for high-risk borrowers from non government sources.

 

  • VA Loans for Veterans

College of Real Estate CORE Difference of Loan and Mortgage Loan 2Military veterans are guaranteed a home mortgage by the U.S. Department of Veterans Affairs. Veterans loans are similar to FHA loans, in that the government isn’t lending money itself, but rather insuring or guaranteeing a loan supplied by another lender. In the event that a vet defaults on their loan, the government will reimburse lenders at least 25% of the loan.

Conventional mortgage loans are generally rejected for borrowers at high risk, but a VA loan offers some benefits. Veterans are not required to make a down payment and may be offered stipulations by their lender to avoid paying PMI. A VA loan is a good option for veterans who have had financial difficulties in the past due to military tours of duty or because of prior occupations.

 

  • Other Types of Mortgage Loans

There are often many different types of mortgages. These include interest-only mortgages, adjustable-rate mortgages, and reverse mortgages. Fixed-rate mortgages remain the most common type of mortgage, although more lenders have begun to offer floating rates in recent years.

Some U.S. states do not use mortgages very often, if at all, and instead use a trust deed system, wherein a third party (a trustee), acts as a sort of mediator between lenders and borrowers. To learn more about the differences between mortgages and deeds of trust, see Deed Of Trust vs Mortgage.

 

Up next, what is Loan vs. Mortgage Agreement?

College of Real Estate CORE Difference of Loan and Mortgage LoanLoan and mortgage loan agreements vary significantly, depending on the type of loan and its terms. Most agreements clearly define who the lender(s) and borrower is, what the interest rate or APR is, how much must be paid and when, and what happens if the borrower fails to repay the loan in the agreed upon time. According to What Businesses Can Do Without Money, “A loan may be payable on demand (a demand loan), in equal monthly installments (an installment loan), or it may be good until further notice or due at maturity (a time loan).” Most federal securities laws do not apply to loans.

There are two major types of loan agreements: bilateral agreements, which involve two parties (or three in the case of a deed of trust), and syndicated loan agreements, which involve an agreement across multiple parties. Bilateral loan agreements are the most common type, are relatively straightforward to negotiate, and involve the borrower and a lender. Syndicated loan agreements take place between multiple lenders to make it safer for all involved, but require a pooling of funds from each party.

 

Now, you may be asking How Loans and Mortgages Are Taxed?

College of Real Estate CORE Difference of Loan and Mortgage MortgagesLoans are not considered income. They are a form of debt. Borrowers do not pay taxes on the money they receive from loans, and transfers made to these loans do not reduce the borrower’s income or cost of living expenses. Similarly, lenders don’t deduct amounts paid as loan interest as expenses. Interest paid by borrowers is deductible, while interest generated by lenders can be considered with other income sources when calculating taxes.

If the loan has been canceled before repayment, the IRS considers the debtor to have income from that loan. This is more complicated when multiple loans are involved, so we will cover cancellation of debt (COD) income for debt relief in greater detail later in this chapter.

Current homeowners are able to deduct their mortgage insurance premiums as a tax write-off, but this perk is set to expire in 2014. There is no evidence of Congress reversing this rule.

Those looking for a loan should be aware of predatory lending practices. These deceptive and sometimes fraudulent practices have been proven to harm borrowers in the 2008 subprime mortgage crisis. Mortgage fraud played a key role in the 2008 subprime mortgage crisis.

 

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