In real estate, there are different credit accounts made for specific purposes. They give you the flexibility needed to achieve financial goals when used correctly. But for mortgages, you’re probably asking, “Is a mortgage revolving credit?”
A mortgage is not revolving credit. A mortgage is a piece of installment credit. This means that you have to pay your mortgage in monthly installments throughout the duration of the loan. After paying it off within a specified time period (15 or 30 years), you’ll gain ownership of the home.
We’ll explain the differences between installment and revolving credit throughout this article. This will increase your financial IQ and give you a better chance of paying off the loan. That way, you can experience both the benefits of a new property and a higher credit score.
Is A Mortgage Revolving Credit?
A mortgage is not revolving credit but is installment credit instead. As its name suggests, the “installments” are the monthly payments you have to make each month. If done correctly, you’ll be rewarded with a higher credit score and ownership of a property.
How do you calculate your monthly payments? Use the following formula to calculate the cost of your monthly payments:
- Mortgage installment loan = Principal Balance + Loan Interest rate
So let’s say you have a principal balance of $100.000 + 2% interest rate. In math terms that’s $100,000 + $2,000 = $102,000. You will have a loan the size of $102,000, which you can pay off based on your payback schedule and type of loan.
For instance, most mortgages will have a 15 – 30 year term. So you don’t have to pay off the $102,000 in one lump sum payment. Instead, you would have to make a monthly payment of $8,500 if you wanted to pay this off within a year.
Let’s say you wanted to pay off your mortgage within 15 years. So you would be divided that $8,500 by 15 to receive $566. That is how much you would have to pay monthly through this loan.
The payment that you must give your lender each month usually remains the same. The monthly payments will go towards your interest in the first stages of the payment schedule. As you continue to make payments, you’ll find that your monthly payments are going towards the principal balance.
When it comes to installment loans, they can become either unsecured (non-collateralized) or secured (collateralized). When taking out a mortgage, the house is the collateral that’s used throughout the loan.
Sometimes installment credit can extend without any collateral required. These types of loans are made based on your creditworthiness, which is quantified by your credit score and your ability to repay mortgages based on your assets and income.
Unsecured loans have a higher interest rate than secured loans. That’s because of the higher repayment risk that your lender accepts.
What’s the Difference Between Installment Credit and Revolving Credit?
Revolving credit is when the borrower has a specific credit limit made by the lender. The limit is based on your credit history, income, and credit score. When you open an account, you can reuse that credit at your own discretion.
With revolving credit, the account is open until the borrower or lender closes it. When you’ve made payments on your revolving credit account, you can borrow those funds again. You can repeatedly buy up to the credit limit until the borrower lender closes it.
A credit card is a good example of revolving credit. When you pay off your monthly credit installments, the lender might increase your credit limit. Still, you’ll have to pay off a monthly balance to show the lender that you’re a trustworthy borrower.
With installment credit, the terms are more fixed. You will access the money loaned to you in one lump sum. That means that you can have access to all the funds once you’re accepted, and most homeowners tend to use that on repairs and upgrades.
However, installment credit lines are harder to qualify for. That’s because the lender is taking a more significant risk by giving you all of the funds at once. Some lenders will run multiple credit checks to see that you’re financially stable enough to take the loan.
The main difference between the two loan types is that revolving credit can be loaned out at any time. It’s faster than installment credit in that regard, but they do have higher interest rates. So make sure you have the right amount of funds to pay for either loan type.
The Benefit of Installment Credit Mortgages
The main benefit of installment credit is that you have fixed monthly payments over a period of time. They can extend for up to 30 years – leading to fewer monthly payments that are bettered aligned with your cash flow needs.
This makes it easier for people to budget their mortgage into their monthly expenses. When applying for a mortgage, chances are your monthly installments are cheaper than paying rent!
Reduced Borrowing Costs
Did you know that installment credit is less expensive than revolving credit? That’s because revolving credit has higher interest rates and a different monthly rate each time.
The lender will give you a lower interest rate if you have good credit when taking out a mortgage. Also, having revolving credit debt has excessive fees for exceeding credit limits or late payments.
Things to Consider Before Getting a Mortgage
While there are a few benefits associated with installment credit, some drawbacks to consider. First, installment credit has a stricter verification process. They have strict qualifications based on your credit history, outstanding debt, and income.
Most of your revolving credit lenders are lenient in their application process. If you’re a high-risk borrower, they will simply increase your interest rates. But for a mortgage, if you’re not accepted the first time, it is a sign that you’ll have to improve your credit score.
Overall, a mortgage is a form of installment credit, not revolving credit. So you’ll have to pay your fees each month to regain ownership of the property. By doing so, you’re improving your financial standing with your lenders while increasing your total home equity.