What is the Difference Between a Loan and a Mortgage?
There's not much of a difference between a loan and a mortgage. A mortgage is one type of loan. But a mortgage typically refers to a loan secured by a real estate property. A loan, on the other hand, refers to any sort of loan, both secured and unsecured. A loan is a type of debt. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.
A promissory note may be secured or unsecured. When it is secured, it means that property, called collateral, may be taken by the lender if the borrower fails to pay the loan payment. If the debtor files bankruptcy, the lender may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrowers property after it is divided among all creditors. Collateral may be many different types of property, such as shares of stock of a company, inventory, accounts receivable, etc.
The parties to the loan must sign it and the notary must witness the signatures. The contract may contain a choice of law clause as to where it will be litigated if a dispute arises. Choice of law refers to what jurisdiction's law is to be applied when there is a dispute in a transaction. The loan document may then be recorded in the county recorder's office where the property is located.
A promissory note may provide for payments to be made in installments or in a lump sum. The terms may provide for a series of smaller payments at the beginning of the loan period and a larger balloon payment at the end of the loan period. The option for a confessed judgment agreement, also called a cognovit note, may also be included. A confessed judgment agreement requires the debtor not to claim defenses and agree to have a judgment entered against him if he fails to pay and the matter is taken to court.
A mortgage is a device used to create a lien on real estate by contract. It is used as a method by which individuals or businesses can buy residential or commercial property without paying the full value upfront. The borrower uses a mortgage to pledge real property to the lender as security against the debt for the rest of the value of the property. In a mortgage, there may be other details regarding issues such as insurance on the property and the right to transfer the property without the lender's approval. A mortgage generally enables you to borrow far more than a loan would. There can be additional charges including arrangement fees, telegraphic transfer fees, property valuation fees and other costs. However, many lenders can include these in their overall borrowings to you.
With a mortgage you make payments, which pay off the interest and the principle sum; the value of the mortgage that you took out. You pay off both until the total has been repaid in full, plus interest.
In general a loan is used if you need only a small amount of money to make up the difference between the cash you have and the amount remaining. A mortgage is typically used if you need a large amount of money to finance the difference.