The vast majority of citizens when buying a home apply for bank loans. And this is not surprising. After all, everyone wants to get their own housing, but not many agree to save for it for many years. Before making such a difficult decision, you should definitely ask about the types and methods of lending.
What to issue? Loan or mortgage? And this is where the question arises: how does a mortgage differ from a real estate loan? Are these different concepts or are they the same thing? Let's try to figure it out together.
What is the difference between a mortgage and a loan?
There are several ways to get money to buy a home:
- classic loan;
- mortgage;
- consumer credit.
The first assumes a down payment and can be issued for up to 10 years. In this case, you will definitely need to confirm your income and provide information on official employment.
In the second case, you will necessarily require a pledge, which will be the acquired housing. However, the loan term in this case is significantly increased.
When applying for a regular consumer loan, making an initial payment is not necessary at all, but each specific bank puts forward its additional conditions for processing.
As part of this article, we will try to make out the difference between a loan and a mortgage. After all, both of these products have not only different conditions, but also their advantages and disadvantages.
Pledge
Sometimes, citizens are interested in another very interesting question: "What is the difference between a mortgage and a mortgage?" The term “mortgage” is often understood as the collateral itself, which the bank requires as a guarantee that the money will be returned on time. The concept of "mortgage lending" - means the type of loan that can be issued on the security of the acquired property. If you are not too immersed in all sorts of subtleties of terminology, then we can confidently say that both of these concepts mean the same thing.
The first difference between a mortgage and a loan (Sberbank or other financial institutions) is the indispensable availability of collateral. It is unlikely that a mortgage can be issued without collateral. While a regular loan, including for housing, can be obtained without additional guarantees.
Target direction
The next thing that distinguishes a home loan from a mortgage is the purpose of the loan. A mortgage is an exclusively targeted loan. It will not be possible to spend the received funds on anything else. Moreover, the procedure for transferring money on a mortgage is structured in such a way that the client does not have the opportunity to hold banknotes in his hands and spend at least part of the money “on the side”.
Of course, any loan can have a special purpose. What you take the money most often indicated when writing an application. But control over the use of funds in this case is much weaker. Therefore, it does not cost anything, for example, to obtain a housing loan, use part of the funds to repair or purchase new furniture. You can even get a loan that does not have a special purpose. Then you do not have to report where the money went.
Amount and terms of lending
Real estate is an expensive purchase. It is almost impossible to save part of the salary and save on it. As you collect, the funds will simply depreciate. This issue is important to consider when contacting the bank. The amount that a person can count on when applying for a mortgage will certainly be much larger than the amount that is issued as part of a regular loan. This is another item on the list of what distinguishes a loan from a mortgage. Getting a regular loan is much easier. Moreover, if the amount is small, then most often one passport is sufficient to receive it. To apply for a mortgage, you will have to collect a pile of papers and prove your solvency to the financial institution a hundred times.
This also implies the loan term - the next item on the list of what distinguishes a loan from a mortgage. A middle-class man is simply not able to quickly pay a huge amount. Therefore, a mortgage can be issued for 25-30 years. At a time when the term of conventional lending rarely exceeds a ten-year threshold.
Interest Rates and Risks
Another important point of the difference between a mortgage and a loan for an apartment is interest and the amount of overpayment. As part of a mortgage loan, you can expect a much lower percentage of overpayment. This is due to such factors:
- longer loan term;
- strict solvency check;
- excellent guarantee;
- essential insurance of vital risks.
When applying for a regular loan (including housing), the bank not only does not reliably know where exactly the money will be spent, but also cannot be absolutely sure that it will receive it back. Therefore, interest rates in this case are much higher.
There is a difference for the client himself. If he cannot repay his mortgage debt, he will just have to give the newly acquired housing to the bank. Most often, claims of financial institutions are limited to this. In case of non-repayment of a regular loan, a person may lose all his property. With a large amount of unpaid loan, the bank will demand repayment of the main debt, as well as accrued interest, fines, legal costs and other payments. If you count all this together, then the amount can come out such that a person simply does not have enough property to pay off the bank.
Another rather important difference is that upon receipt of a mortgage, the bank will most likely require insuring the collateral itself, as well as the life and work capacity of the client. With conventional lending, insurance is optional and the bank is not entitled to demand it. If you refuse to take out insurance, the only thing they can “punish” you with is to increase the interest rate.
Who issues
You can get a regular loan (including housing) not only at the bank. Similar services are provided by many financial and credit institutions and microfinance organizations. But for the registration of a mortgage should go only to the bank. Moreover, not every one of them provides a similar service. Especially if the borrower expects to receive favorable conditions.
This is because the issuance of a mortgage is associated with serious checks of the client. Only a powerful security service, which small credit institutions most often simply do not have, can carry out such actions.
Down payment amount
The next thing that distinguishes a loan from a mortgage is the availability of the down payment and its size. When applying for a consumer loan, the initial payment is most often not required at all or it is very small.
To apply for a mortgage, you just need to have some amount that covers part of the planned expenses. Moreover, the higher this contribution will be, the lower the percentage can be obtained at registration.
What's better?
Exploring the question of how a loan differs from a mortgage on housing, many ask themselves one more thing: "How is it most profitable to get money?" A definite answer cannot be given here. It all depends on the specific situation.
A mortgage will be beneficial if:
- You can take part in any preferential program.
- You already have young children or are planning to get them in the near future. The fact is that in the presence of minor children, even with the loss of collateral, you are required to provide another residential building.
- Your financial capabilities are stable and you are sure to “pull” multi-year monthly payments.
If you need a relatively small amount and you already have 60–70% of the cost of housing, it makes no sense to get involved in mortgage lending. It is much more economical to take a regular loan and pay it off as soon as possible.
There is one more nuance: with a mortgage, the bank becomes the owner of the purchased property (until the loan is fully repaid), and with ordinary lending, this is your property. If the unexpected happens and you can’t pay the debt, then the bank will sell the mortgage apartment, and you yourself and on your own terms will sell the mortgage apartment. So you can make a lot more money, pay the bank and buy cheaper housing.