What’s the Difference Between a Mortgage and a Personal Loan?
A mortgage and personal loan are two popular financial products. If you’re just starting to explore lending, you might not fully understand the differences between the two. The reality is that while they’re both considered loans, they're intended for different purposes. Let’s dive deeper into the differences between a mortgage and personal loan so you can choose the most useful product for your unique needs.
Are Mortgages and Loans the Same Thing?
Before we discuss how a mortgage and personal loan differ, we'd like to clarify that a mortgage is considered a type of loan. When you take out a loan, you receive money in exchange for future repayments of its value, the principal amount, along with any interest or finance charges. Also known as a home loan, a mortgage is a type of loan that you use to buy a house. Lenders secure your mortgage by the house. If you default on the monthly payments, they can start foreclosure proceedings on the property to take the house back.
Personal Loan Vs. Mortgage
While a mortgage is a loan that can help you buy a house, a personal loan is a loan that can be used for just about anything. You can use a personal loan to pay for a home improvement project, consolidate credit card debt or even go on vacation.
In most cases, a mortgage comes with a loan term of anywhere from 8 to 30 years. It also uses your house as collateral, so if you default on your mortgage payments, you may lose your home. A personal loan, however, is more of a short-term loan that ranges from 1 to 7 years. The most common terms are 3 or 5 years.
Unlike a mortgage, a personal loan is considered unsecured debt. This means it doesn’t require you to use a house, car or anything else you own as collateral. If not repaid, your credit could take a major hit and the lender may pursue other options to recoup the debt. A lender’s options for recourse will depend on the laws that apply in your jurisdiction.
In addition, a personal loan won’t allow you to borrow as much money as a mortgage will. Typically, the maximum loan amount you’ll ever see for a personal loan is $100,000. Depending on factors such as your credit profile, income and debt-to-income ratio, lenders like us will allow you to borrow up to $45,000*. With a mortgage, you can borrow far more, depending on your income and credit score.
Can You Buy a House with a Personal Loan?
Since a personal loan can be used for just about anything, you may wonder if you can buy a house with one. In most cases, it’s better to buy a home with a mortgage. If you’d like a single-family house that’s a couple hundred thousand dollars, a mortgage is your best bet. You’ll likely qualify for a larger loan and land a lower interest rate and longer terms such as 15, 20 or 30 years, so you can really take your time paying off your house.
Instead, we recommend a personal loan to help out with your home journey. For example, some great ways that a personal loan can help are: if you need to raise your credit score to qualify for a mortgage, cover moving expenses, or possibly fix up your old house prior to selling (or renovate/add to your new dream home).
How to Get a Mortgage to Buy a House
Whether you decide to get a mortgage or personal loan to fund your house purchase, the process is pretty similar. Do your research and find a few lenders that meet your needs. Then, fill out an application or contact a mortgage banker to get started. Once you’re approved for a mortgage, choose the option that offers you the best rate and terms and go through the application process.
Can You Pay Off Your Mortgage with a Personal Loan?
There’s no denying that a paid-off house is the American dream. But if you want to own your home free and clear and don’t have the cash on hand to do so, you can use a personal loan to help. However, keep in mind that your interest rate on your personal loan may be higher than your mortgage interest rate.
If your goal is to pay off your mortgage early, there are other strategies that can make that a reality. See if you can refinance your mortgage, apply lump sum payments toward your principal, cut expenses and make payments bi-weekly rather than monthly.
If you’re in the market, we can provide you with all your personal loan needs and our sister company, Rocket Mortgage, can walk you through the mortgage journey. To select the ideal option, consider what you’d like to buy, how much money you need to borrow, and the types of interest rate and terms you can secure.