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Mortgage Vs. Loan: The Difference Between A Mortgage And A Personal Loan

Miranda Crace5-Minute Read
UPDATED: July 25, 2023


Mortgages and personal loans are two popular financial products. If you're just starting to explore lending, you might not fully understand the differences between the two. While there are some notable similarities between mortgages and personal loans, they're intended for different purposes.

This article will take a closer look at the differences between a mortgage and personal loan so you can choose the most useful product for your unique needs.

Is A Mortgage A Loan?

A loan is a financing agreement between a lender and a borrower, where the latter borrows a certain amount of cash and repays it over a period of time. A mortgage, or home loan, is a type of loan used to buy real estate, and secured by the purchased land or house.

Other types of loans, such as personal loans, aren’t restricted to real estate, and can help finance various purchases or expenses for their borrowers. 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.

Personal loans typically have fixed rates, meaning their monthly interest will stay the same for the life of the loan. Mortgages can be fixed-rate as well, but an adjustable-rate mortgage (ARM) can fluctuate your monthly payment amount depending on housing market trends.

Personal Loan Vs. Mortgage

Mortgages and personal loans can both offer financing for large purchases, but they’re far from interchangeable. Let’s take a closer look at the differences between a mortgage and a personal loan.

What They’re Used For

While a mortgage is a loan that can help you buy a house, a personal loan can be used for just about anything. Some popular uses for a personal loan include:

Length Of Term

In most cases, a mortgage comes with a loan term of anywhere from 8 – 30 years. A personal loan, however, is more of a short-term loan that ranges from 1 – 7 years. The most common terms can be 3 or 5 years.

Down Payment

Often you’ll need to make a down payment on a home in order to qualify for a mortgage. The amount of your down payment can vary, but anything less than 20% will require you to purchase private mortgage insurance (PMI) and pay a monthly fee.

Since a personal loan isn’t often tied to a specific purchase, it usually won’t require any kind of down payment to qualify.

There are also government-backed home loans, like Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans, that don’t require any down payment if a borrower meets certain requirements.

Secured Or Unsecured

As mentioned above, a mortgage is a secured loan that uses your house as collateral. If you default on your mortgage payments, you may lose your home through the foreclosure process.

Unlike a mortgage, a personal loan is largely considered an unsecured loan. 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 can depend on the laws that apply in your jurisdiction.

Loan Amount

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 (DTI) ratio, personal loan companies and platforms like Rocket Loans℠ will allow you to borrow up to $45,000. With a mortgage, you can borrow far more – again, depending on your income and credit score.

How To Get A Mortgage Or Personal Loan

If you decide to get a mortgage or personal loan, the processes are relatively similar. To get a mortgage, do your research and find a few lenders that meet your needs. Then, contact a mortgage banker or lender to get started on the preapproval process. Once you're preapproved for a mortgage, choose the option that offers you the best rate and terms, submit a full application and go through the home buying process.

Getting a personal loan is a similar application process, but is much more dependent on your credit score and DTI, as the loan will likely be unsecured. Following an approval, you can expect to receive your funds within 1 – 7 business days, and then put the cash toward its intended use.

If approved through Rocket Loans, you could potentially get your money that same day.*

FAQs For A Mortgage Vs. A Personal Loan

Can you buy a house with a personal loan?

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 get 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.

A personal loan can still help out with your home journey, though. For example, some great ways that a personal loan can help include covering moving expenses, as well as making renovations or additions to raise your home’s value prior to selling.

If you’re looking to buy a manufactured home, a personal loan can be a potential loan option for this home type.

Can you use a personal loan for a down payment on a house?

Many lenders explicitly forbid the use of personal loans to cover a home’s down payment. Lenders want to know that a buyer is financially stable enough to repay a mortgage, and using a loan to cover a down payment can be a sign that they’re not.

Can you pay off your mortgage with a personal loan?

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 pay down your mortgage. If you already have a good interest rate on your mortgage, though, you may not want to risk having a higher rate on a personal loan.

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 or make payments biweekly rather than monthly.

Final Thoughts

If you’re on the hunt for a new home, you’ll want to look into mortgage loans. A personal loan can be good for a variety of other big purchases, and will typically have shorter terms and smaller loan amounts.

If you’re interested in a personal loan, you can get started today with a prequalification from Rocket Loans and see what rates and terms you may qualify for.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.

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Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.