Difference Between a Loan and Mortgage for Buying a Home

First Time Home Buyer Loans

When talking about buying a home, it can be very difficult to finance. Luckily, there are a lot of options available in the market. Developers and banks have also come up with many different schemes and options to make home buying affordable and easy. There are plenty of options to choose from and the most common one is a Home loan.

There is a lot of conjecture regarding a home loan and a mortgage. More often than not, they are used interchangeably. However that is not the case. Mortgage is a type of loan and they are not separate.

A loan is a relationship between a lender (the creditor) and borrower (the debtor). The creditor “loans out”the money, whereas the borrower has “takes out” a loan. The money borrowed is known as the principal. The borrower pays back the principal along with the interest.The loan duration is usually pre-determined and the repayments are made monthly.

Out of the many kinds of loans, one of the most well-known types is a mortgage. They are secured loans that are specifically tied to real estate. The property is used as a collateral (mortgage) in exchange for money that is paid in installments over time. This helps the borrowers to get loans of a high value (equal to or less than that of the property) since generally, properties are valued very high. It also protects creditors from bad debts by giving them a guarantee that in case of the borrower going bankrupt, they can seize and sell the collateral to earn their money back.

Comparison chart

Loan versus Mortgage comparison chart
Loan Mortgage
About A loan is a relationship between a lender (the creditor) and borrower (the debtor). The creditor “loans out”the money, whereas the borrower has “takes out” a loan. The money borrowed is known as the principal. Mortgages are secured loans that are specifically tied to real estate. The property is used as a collateral (mortgage) in exchange for money that is paid in installments over time.
Types There are many types of loans ranging from Open ended and closed ended, unsecured and secured, student loans, mortgage loans, payday loans etc. Mortgages are fixed to slightly more than the value of the loan.

So while buying a home, in case of a mortgage, you will have to mortgage your home. This means that you if you fail to pay, the bank has the right to sell your home to recover their money. Well we all know that tit doesn’t happen unless you go bankrupt. So don’t worry, Mortgage is just a guarantee for the bank.

SO which is better. Generally, mortgage loans tend to be more expensive than home loans.

Why mortgage loan is expensive than home loan?

  • Most banks extend mortgage loans, which is mostly loan against property, for personal purposes.
  • Mortgage loan is often obtained for the purpose of repaying the existing loan/debt.
  • The credit risk involved in mortgage loans is higher than home loans. The lender presumes that a customer willing to buy a loan at a higher interest rate is facing acute financial stress.
  • Loan against property/mortgage loan is the most commonly used loan product for self-employed professionals and non-professionals, thus, strategized to be highly priced.
  • The average LAP ticket size is more than that of a home loan. For a property worth Rs 1 crore, the borrower can raise as much as Rs 60 lakh i.e. if the lender agrees to fund 60 per cent of the market value of the property.
  • A home loan up to Rs 28 lakh falls within the purview of Priority Sector Lending (PSL) but LAP does not fall under this category.

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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