The Difference Between Mortgages and Loans: The Basics

The Basic Difference Between Mortgages and Loans

Mortgages and loans, what makes them differ from one another, and what makes them the same? Let’s take a closer look at the two options.

We often have many questions about mortgages, especially for those looking into the real estate market. Many of the questions you might hear are similar to the following: why is it called a mortgage rather than a loan, and how do the two differ from each other? So keep reading to learn about loans and mortgages.

What Is a Loan?

The word loan is defined as “a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount,” according to Investopedia. With loans, the lender will add interest to the principle, meaning that you will have paid an extra amount to the lender once the loan is repaid. Interest is typically calculated as a percentage of the loan based on the term and agreement of the loans. Here are some definitions and terms to keep in mind about loans:

  • Term – A term is how long you are given to pay back a loan. For example, car loans typically have a term of five to six years.
  • Interest Rate – the amount a lender charges for using assets expressed as a percentage of the principal. 
  • Secured Loan – Secured loans are backed by collateral, the asset for which the loan was given. For example, if you take out a loan for a boat, the boat is considered collateral, which can be repossessed if payments are not being made.
  • Unsecured Loan – An unsecured loan is one in which you don’t have to have collateral to back it. Instead, the loan is given with the idea that the loan will be paid back in full without having to put up collateral. Personal signature loans are a good example of an unsecured loan.
  • Revolving Loan – A revolving loan is one where you can have a line of credit that you spend, pay back, and then can spend again. A credit card is a type of revolving loan that is commonly seen.
  • Personal Loan – A personal loan has no collateral to back it, so a personal loan can only be lent for $100,000. Signature loans are the most common personal loans.

What Is a Mortgage?

A loan is the name of a financial transaction primarily intended to reduce the amount of debt owed. It’s a type of borrowing in which the borrower requests a sum of money from a lender, and the loan is used to pay for goods or services or reduce the total amount of debt owed to creditors. It might also be used to purchase assets, or it might just be something that a borrower does with money borrowed from another lender. On the other hand, a mortgage is a long-term loan, where the borrower borrows a large sum of money from the lender. The borrower owes the money back to the lender, but the borrower owes the money back to the lender over a long period of time, depending on the rate and term of the loan.

The Difference and Similarities Between Mortgages and Loans

There is a difference between mortgages and loans that is distinguishable. A mortgage is the process by which a person gets a loan to purchase a home. A mortgage is a loan taken out to help you acquire a home and for the mortgage amount to be repaid. The mortgage rate is based on the interest rate that the lender is charging and can vary based on whether you want a 30-year mortgage or a 15-year mortgage. A loan is more short-term that is repaid over a relatively short period.

While a mortgage is a type of loan, you can use a mortgage only to purchase a home, whereas certain loans can be used however the borrower chooses. A personal loan technically can be used to purchase a home, although a personal loan isn’t recommended as they typically have higher rates and shorter terms. If you choose to purchase a home, a mortgage with a term of 15 to 30 years allows you to borrow more, so it’s the better option as long as you qualify for the amount you need for the home you want.

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