In the course of learning about property, investments, and various other topics concerning real estate, the terms ‘loan’ and ‘mortgage’ are commonly seen phrases. Some people use it interchangeably, and while they do have similar meanings, there still exists a difference between the two. Today’s Property Basics 101 will explain the meaning and difference between the two words, so that you’ll never be confused again when they crop up in conversations.
First of all, a mortgage is a type of loan (hence it is often used interchangeably) used for the purchase of real property, secured by a lien on the property. The property is legally owned by the person purchasing it. This means that the real estate or property being purchased is used as collateral, or security, for the loan. In the case that the borrower (owner) defaults on the loan or fails to abide by the contract terms, the lender (bank) is allowed to sell the property to pay off the mortgage.
James buys a double-storey terrace house and takes out a mortgage to buy the property. He pays a down-payment and the rest is loaned from the bank with interest, and a contract to pay a monthly installment. However, after 3 years, James does not pay his monthly payment even after several warnings by the bank. Consequently, his house is taken by the bank and auctioned off to pay off the mortgage loan, and James no longer owns the house.
A loan, on the other hand, is rather more simple in terms of explanation. It is a sum of money provided by a financial lender (the bank), which enables the buyer to purchase property. This is typically known as a home loan. The security for the loan can be, but not necessarily, the property in question, although in most cases people will use their property as collateral, hence the confusion between mortgage and loan. Generally, the only other assets that can be used as collateral include businesses or stock options.
So, what’s the difference?
Both are identical in meaning, but basically, a mortgage is the security for the loan (usually the property itself), whereas a home loan is the money borrowed to finance the purchase of a property.