One of the most common opinions and practices in financial vocabulary is that a mortgage is a loan. And those mistakes aren’t made by financial professionals but by common folks who just got a mortgage. So, where does the confusion arise? Let’s answer the question is a mortgage a loan.
A mortgage is not a loan. A mortgage is a lien or guarantee that you will return a loan you took from the bank. The property, in a way, becomes the lender’s property, and if you don’t repay all your debt, they can take it from you.
So why is a mortgage not called a loan? Well, simply because to have a mortgage, you must have a loan too. Simply put, all mortgages come with a loan, but not all loans come with a mortgage. But let’s explain this in more detail.
How Does A Mortgage Work?
Mortgage, in essence, is an agreement between you and the bank where you give a bank or lender the right to take your property if you don’t repay your debt. In exchange, you will get money. So if you wish to buy a house, you will go to the bank, and the bank will give you a loan to purchase a house, but the house will be under the mortgage. On the other hand, if you already have a property that is completely in your possession, you can put a mortgage on it and borrow the money from the bank.
What Is Included in a Mortgage Payment?
So depending on the amount of money you borrow, mortgage loans can last 15, 20, or 30 years, and even if a mortgage is not a loan agreement, it will look like it is. The payment will probably be in the form of monthly installments, and you will have to pay the principal and the interest. Here is what is included in a mortgage payment:
- Principal – This is the amount of money you will take from the lender.
- Interest – In essence, this is a mortgage rate that is expressed in percentages, and it is the amount of money the lender will charge you for borrowing the money.
- Property taxes – This is something that the lender usually collects from the borrower to pay property tax. This money usually goes on an escrow account, and the tax is paid from these funds.
- Homeowners insurance – No lender will lend you money without proper insurance of the property. But this insurance is something that protects both you and the lender if something happens to the property.
- Mortgage insurance – This is typically charged when you put down less than 20 percent of the home’s purchase price as a down payment.
Alt-text: Man holding a contract and a pen
Make Sure Your Mortgage Loans Are in Accordance to Your Home Value and Compare Monthly Mortgage Payments at Different Banks
Not all lenders will give you the same deal. In the end, it is in their interest to make a profit. So before you sign any contracts, make sure to get the best deal possible. Compare rates and see how much you will pay in the end. Depending on your credit history, the price can be different. But one thing is for sure – if you are taking a mortgage on a whole property, make sure you do your research about your home value before talking to the lenders. For example, if you have a property worth $150,000 and the bank is willing to give you $90,000 for the whole property, you can agree this is a bad deal. Check this video for more information.
There Are Different Types of Mortgages Loans
Besides different lenders you can find to give you a mortgage, you can also be presented with different types of mortgage loans. Take a look at all types of mortgages and the pros and cons for each type.
|Type of mortgage||Pros||Cons|
|Fixed-rate mortgage||The rate will be fixed until the end of the payment.||In years you can end up paying higher installments.|
|Adjustable-rate mortgage (ARM)||You will have a fixed rate for the first couple of years, usually lower than the interest rate.||After the fix rate period is over, your rate can change even on a monthly basis.|
|FHA loan (Federal Housing Administration loan)||Good for first-time homebuyers as it requires minimum credit scores and lower down payments.||The size of the loan may be limited.|
|Reverse mortgage||Older homeowners can get a monthly income based on their home’s value.||Can be subjected to false advertising promises by the lenders who prey on seniors.|
|VA loan||For veterans, it offers low rates and down payments||A loan can be limited|
|Balloon mortgage||Low initial fixed-rate period||After the initial period, you will pay more.|
Is a Mortgage a Loan, and Why Not?
The main difference between a mortgage and a regular loan is that the bank can only force you to pay your debts by suing you. As soon as you put some property on the mortgage agreement, that property becomes lender’s. For example, you can place a mortgage on a car and get 50% of the car’s current value. You will pay this loan, but you will essentially pay back your car. Another difference between regular loans and mortgage loans is that regular loans are limited. The amount of money and time needed to pay is usually limited and is not large enough for you to buy a home. The practice is that something must be vouched to the bank for higher amounts of money as insurance.