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October 4, 2022 2:18 PM
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Between a Loan and a Mortgages

If you are thinking of buying a new home, there must be a lot of things running through your mind. For instance, you may be thinking of dialing the Cox customer care number to ask the provider to install their service at your new location. However, one thought that tops all the other ones is whether to get a loan or a mortgage. Sometimes, you may have heard people use the two terms interchangeably. While it’s true that a mortgage is a type of loan, the two work in different ways.

What Is a Loan?

A loan is a financial agreement between the lender and the borrower. The former gives money to the latter in exchange for the repayment of the loan amount plus interest. The borrower accepts the conditions and returns the payment at the lender’s terms. The loan taken by the borrower can be used for both personal and commercial use. Also, they can be either secured or unsecured.

Types of Loans

There are different types of loans. Let’s have a look at them:

1. Open-End and Closed-End Loans

Open-end and closed-end are two main categories of loan credit. Open-end credit is also called revolving credit. It is the type of credit that can be borrowed more than once. Since it is open, you can continue to borrow. One of the most common forms of open-end credit is a credit card. If you own a credit card that has a limit of $5,000, you can continue to borrow credit as long as you pay the dues timely. Also, make sure never to meet or exceed the limit of your credit card.

Closed-end credit is the type of loan in which a fixed amount is given to the borrower with the agreement that the individual will be repaying the credit at a later date. This is also called a term loan.

2. Secured and Unsecured

Loans taken can be secured as well as unsecured. Secured loans which can also be referred to as collateral loans are connected to assets. It can include auto loans and mortgages. In a secured loan, the borrower offers an asset as collateral in exchange for cash. This is a safer investment for lenders. However, do note that secured loans typically provide borrowers with larger amounts of money, and that too at a low-interest rate.

An unsecured loan is not linked to any kind of asset. This means that a lender will not be able to take advantage of the asset to recoup financial losses if the borrower fails to return the debt. A lender has the liberty to either accept or reject the loan request of a borrower based on the individual’s credit score, credit history, and income.

3. Other Types of Loans

Secured/Unsecured and open-end/close-end are broad categories of loans that apply to other types of specific loans such as:

  • Student Loans (closed-end and often secured by the government)
  • Payday loans (closed-end and unsecured)
  • Consolidated loans (closed-end and secured)
  • Mortgages (closed-end and secured)

What Is a Mortgage?

A mortgage can be classified as a loan. However, your property or home is tied to the terms of the loan. Therefore, it can be considered a secured loan as your asset is getting used as collateral. This means that if the borrower does not meet the repayment requirements successfully, the lender will acquire legal rights to either sell or claim your property. A mortgage can be used to purchase a new property or home. Home purchases are usually expensive, and most borrowers don’t have enough cash to buy the asset.

Types of Mortgages

Let’s have a look at different types of mortgages:

1. Fixed-Rate Mortgage

Most home loans are fixed-rate mortgages. These are large loans that require borrowers to pay the debt over a long period of time. In such loans, the interest rate is fixed unless the loan gets refinanced.

2. FHA Mortgage

The FHA insures mortgage loans that FHA-approved lenders hand over to high-risk borrowers. This loan is not given by the government. Instead, independent institutions such as banks insure the loan. Do keep in mind that these institutions will insure the loan to a certain limit. FHA loans are typically given to those who are buying a house for the first time.

3. VA Loans for Veterans

A VA loan is the same as an FHA loan. This means that the government will not issue the loan itself but will insure the loan. VA or the U.S. Department of Veteran Affairs guarantees the home mortgage loans opted for by military veterans. VA loans offer many benefits like veterans will not be required to make any down payment or carry PMI.

Conclusion

Mortgages and loans are two types of borrowing solutions that can allow borrowers to purchase whatever they want. If you have a desire to buy a new house, you should take some time and think about what will work best for you. Of course, your decision will depend on your financial situation. You can contact your advisor and find out what borrowing path will be a good option for your needs.

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