Difference Between a Loan and Mortgage for Buying a Home

First Time Home Buyer Loans

Mortgages refer to loans wherein personal property or real estate is used to secure the same.

A loan on the other hand, refers to an engagement or relationship between a borrower and a lender. While the borrower in this case can conveniently be termed as the debtor, the lender is also known as the creditor. The amount of money that is received and lent in the transaction between these two entities is termed as a loan. The initially borrowed amount is referred to as the principal amount. In addition to the principal amount, an interest is needed to be paid back by the borrower. Usually, the duration of this loan agreement is pre-determined and repayment is in the form of installments, which may be monthly, quarterly or yearly.

Mortgage as a type of loan

There are a number of different variants of loans but mortgages are one of the well – known ones. Mortgages are basically secured loans. These are related to land, house or real estate property. In exchange for the borrowed money that is paid in installments, the property is owned by the borrower. This allows the borrower to utilize the property much sooner compared to the situation, when the individual is supposed to pay the full amount upfront. The end result of the payment of installments is that the debtor becomes an independent and complete owner of the property once the amount is fully repaid. This agreement also provides a protection to the creditors or the lenders. In a case wherein the debtor misses installment payment repeatedly, the property can be foreclosed upon. This implies that the lender can take the ownership once again in order to fulfill and recoup any financial losses occurred.

Difference between the two

  1. Security – A mortgage is always a secured loan. Home loans can be unsecured or secured, depending on the arrangement between the borrower and the lender.
  2. Payment mode – The money is lent by the debtor in case of home loan and a full payment is made. The debtor then pays back to the creditor in installments. In case of mortgage, the property is tied to the loan. The property belongs to the borrower in exchange of installments that are paid over time.
  3. Types

Home Loans – Close ended or open ended, secured or unsecured

Mortgages – fixed rate mortgages, reverse mortgages, interest only mortgages, VA loan mortgages, adjustable rate mortgages

How are the mortgages and loans taxed?

Loans do not fall under taxable income. Rather, they are considered a form of debt. Hence, borrowers do not have to pay any form of taxes on the money that is received by applying for the loan. On the other hand, lenders cannot deduct the amount given as loan from their taxes. Also, the payments that are received from any borrower do not fall under the gross income of the lender. When we talk of the interest, the borrowers or the debtors are able to deduct the interest amount from their taxes. The Creditors must consider interest as an addition to the gross income.

About Jennifer Cribsly

I'm a former real estate broker who specialized in helping first time buyers be able to purchase a home. Now full time mom, part time real estate owner/investor.
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