What Is the Difference Between a Mortgage and a Loan?

Many of the best things in life are free, but sometimes they aren’t, and most people don’t have enough cash to fund major purchases, such as a new house or vehicle, home renovations, a once-in-a-lifetime vacation, or a dream wedding. 

Banks and other lending institutions help make these purchases possible by offering different types of loans, such as mortgages and personal loans, that can be repaid over time with interest. 

Many people use the terms “loan” and “mortgage” interchangeably. Technically, this isn’t wrong, but there are differences between the two. One way to think of it is that all mortgages are loans, but not all loans are mortgages.

What does that mean for the borrower? Let’s take a closer look.

The Differences Between a Mortgage and a Loan

Although mortgages are technically a type of loan, mortgages differ from consumer and personal loans in several ways. 

Purpose

The most fundamental difference between mortgages and loans is how the borrower can use them.

For example, a mortgage can only be used to purchase or refinance a home, land, or other real estate.

A non-mortgage loan can be used for a range of purposes and purchases, including recreational vehicles, boats, major life events, higher education, medical expenses, financial emergencies, and debt consolidation. 

Loan Amount and Terms

Because mortgage loans are typically much larger than other types of loans, borrowers can repay the lender over a longer amount of time, with the most common repayment terms extending 15, 20, or 30 years.

With a few exceptions, mortgage payments are structured as fixed monthly installments over the loan term, with each payment comprising principal, interest, property taxes, homeowners insurance, and private mortgage insurance (PMI), if applicable.

Non-mortgage loans are structured differently, with loan amounts and repayment terms primarily determined by the type of loan and the borrower’s credit health and history. For example, repayment terms can range from a few months for a small personal loan to several years for a car loan.

Collateral

Collateral is a physical or financial asset that belongs to a borrower and is used to secure a loan. If the borrower defaults on the loan, the lender can take possession of the asset to offset the financial loss.

Home loans are always secured by the property being purchased. If the borrower defaults on the loan, the lender can sell the house or land and use the proceeds to satisfy the debt.

Collateral requirements for non-mortgage loans are determined by whether the loan is secured or unsecured. 

Secured loans require collateral. This includes car loans, which are secured by the vehicle, and business loans, which can be secured using business assets such as equipment, inventory, or real estate. 

Unsecured loans—such as student loans, personal loans, and credit cards—are based on the borrower's credit score and repayment history and do not require collateral. 

Loan Approval

The journey to a mortgage loan approval is more complex and lengthy than a consumer or personal loan. 

Before approving a mortgage application, lenders require multiple credit checks, detailed income and employment verification, a satisfactory property appraisal, and other documentation to help them evaluate the borrower’s ability to repay the loan.

Non-mortgage loan approvals are generally faster and less complex, with most requiring only a credit check, income verification, and, in some cases, collateral valuation.

Getting the Most Out of Your Mortgage

Mortgages and loans can be an integral part of a successful financial strategy, but understanding how these tools are different is important to achieving your financial and lifestyle goals.

Not sure which mortgage is right for you? The FFB Mortgage Lenders team has decades of experience helping home buyers make informed decisions about their mortgage options. Let’s set up a time to talk.