Do you also find it difficult to differentiate mortgage loans from residential loans? Worry not! You are not the only one. We come up with a perfect solution to permanently eliminate your confusion. So lay back and follow us till the end.
First, let us make you understand what mortgage loans are.
Mortgage Loans
A mortgage loan is a secured loan type in which borrowers are allowed to avail a fund by providing a fixed asset in return to the lender. This asset could be a property or a car which would be used as collateral to the lender.
Before starting with your mortgage loan procedure, we suggest you understand what it’s all about. Don?t forget to compare the best mortgage rate Maryland, Pennsylvania and other states of the United States.?
Features of mortgage loans
- The ROI (Rate Of Interest) in mortgage loans can be lower than in commercial loans
- You are given the option to choose from different interest rate options to service your loan
- The LTV ratio in mortgage loans is generally 60% to 70%
- Borrowers can avail of mortgage loans on a wide range of properties, like fully constructed or under constructed property etc.
- It is available for longer and shorter tenures.
- The quantum funds sanctioned in mortgaged loans are generally higher.
Let?s understand with an example:
Suppose you borrowed $70,000 to buy a property like a shop, and you pay off a sum of $15,000, then your principal money will be $55,000. So, according to your set period of time, you will need to pay part of the capital plus the interest money to the lender.
Now let us go through what residential loans are and their features.
Residential Loans
A home loan provides capital to the borrower to buy, construct, and renovate a residential property. The collateral considered by the lenders in residential loans is generally the home itself.
Features of residential loans
- It can be availed only for home-related expenses like buying a new house or rebuilding the old one.
- One can get a residential loan depending on the eligibility criteria, repayment capacity and income.
- You can choose different interest rate options similar to mortgage loans.
- Residential loans are secured and collateral is required.
- The tenure for residential loans can be 20 years.
Let?s understand with an example:
Imagine you want to buy a house worth $50,000, and you have $10,000 for a down payment but need to borrow $40,000 from lenders. After submitting your details, the lenders agree to your demand for a residential loan of $40,000 of tenure of 30 years with an interest rate of 5%. So every month you would have to pay a part of the capital plus the interest money to the lender.
Comparison between Mortgage loans & Residential loans
After learning what are mortgage and residential loans, the best way to understand the difference is through a tabular comparison. We have compared the features of both types of loans to ease the difficulty. Read the comparison below and understand the basic difference between mortgage loans and residential loans.
| Mortgage Loans | Residential Loans |
| It lends money for personal and business purposes. | It lends you money only for personal purposes that are residential property. |
| It is a soft money loan | It is also a soft money loan |
| You can use the capital to buy any property or item. | You can only get a residential property. |
| You can rent the property bought by a mortgage loan. | You can not rent the residential property until the residential loan tenure is over. |
| It has different interest rate options to choose from like fixed interest rates and floating interest rates. | It is similar to mortgage loans, in regards to the choice of interest rate options. |
| They are the loans taken against property collateral. | Property is used as collateral in residential loans. |
| The mortgage loan interest rates are generally 1 to 3 per cent higher than residential loans. | The residential loans are comparatively low. |
| It has high processing fees of about 1.5%. | It has comparatively low processing fees of about 1.2%. |
| It generally has a high tenure. | It has comparatively less tenure than mortgage loans. |
The question that which one of these two loans are better is not relevant, since both mortgage loans and residential loans serve different purposes.?
Conclusion
We have thoroughly discussed the difference between mortgage loans and residential loans in the former section and hope that your doubts and confusion are removed by now. However, if you still have any doubts or any further differences you think we missed, please drop them in the comment section below.
