Loan vs Mortgage

Loans

A loan is a relationship between a lender (also known as a creditor) and a borrower (also called a debtor). The money lent and received in this transaction is known as a loan. Loans are used by individuals, organizations, and even governments for various purposes.

There are many types of loans, including:

• Open-end and closed-end loans
• Unsecured and secured loans
• Student loans
• Mortgage loans
• Payday loans

Loan vs Mortgage

Loan vs Mortgage

Financial and Legal Definitions

Loans are structured financially when one party lends money to another with the expectation of repayment, usually with interest, within a specific time frame. Loan agreements contain terms, repayment requirements, and interest rates. Federal laws protect both creditors and debtors from financial harm.

Loan and Mortgage Terminology

Key terms to understand:

• Principal: The initial borrowed amount.
• Interest: The fee charged by the creditor for borrowing money.
• Interest Rate: The rate at which interest is repaid.
• Annual Percentage Rate (APR): The total cost of a loan over a year.
• Pre-qualified: An estimate of the amount a person is eligible to borrow.
• Pre-approved: The first step in a formal loan application.
• Down Payment: An upfront payment by the borrower.
• Lien: A legal right a lender has to a property.
• Private Mortgage Insurance (PMI): Protects the borrower’s ability to make mortgage payments.
• Prepayment: Paying a loan in part or in full before the due date.
• Foreclosure: The legal process used to recoup financial losses from a defaulted loan.

Types of Loans

Loan vs Mortgage

Loans can be categorized as:

• Open-end (revolving credit) or closed-end (term loans).
• Secured (collateral loans) or unsecured loans.

Various specific loans, such as student loans, small business loans, veterans’ loans, mortgages, and payday loans, fall into these categories.

Types of Mortgages

Loan vs Mortgage

Mortgages are secured loans tied to real estate property. Some common types include:

• Fixed-Rate Mortgages: Repaid over a set period with a fixed interest rate.
• FHA Mortgage Loans: Insured by the Federal Housing Administration.
• VA Loans for Veterans: Guaranteed by the U.S. Department of Veterans Affairs.
• Other types include interest-only mortgages, adjustable-rate mortgages (ARM), and reverse mortgages.

These descriptions should help you understand the concepts and differences between loans and mortgages more clearly.

VA Loans for Veterans

The U.S. Department of Veterans Affairs guarantees the home mortgage loans taken out by military veterans. VA loans are similar to FHA loans, in that the government is not lending money itself, but rather insuring or guaranteeing a loan supplied by another lender. In the event that a veteran defaults on his or her loan, the government repays the lender at least 25% of the loan.

A VA loan comes with some specific benefits, namely that veterans are not required to make a down payment or to carry private mortgage insurance (PMI). Due to tours of duty having sometimes affected their civilian work experience and income, some veterans would be high-risk borrowers who would be rejected for conventional mortgage loans.

Other Types of Mortgages

There are many other kinds of mortgages, including interest-only mortgages, adjustable-rate mortgages (ARM), and reverse mortgages, among others. Fixed-rate mortgages remain the most common type of mortgage, by far, with 30-year fixed-rate programs being the most popular form of them.

Deed of Trust

Some U.S. states do not use mortgages very often, if at all, and instead use a trust deed system, wherein a third party, known as a trustee, acts as a sort of mediator between lenders and borrowers. To learn more about the differences between mortgages and deeds of trust, see Deed Of Trust vs Mortgage.

Loan vs. Mortgage Agreements

Loan and mortgage loan agreements are laid out similarly, but details vary considerably depending on the type of loan and its terms. Most agreements clearly define who the lender(s) and borrower is, what the interest rate or APR is, how much must be paid and when, and what happens if the borrower fails to repay the loan in the agreed upon time. According to the book How to Start Your Business With or Without Money, “A loan may be payable on demand (a demand loan), in equal monthly installments (an installment loan), or it may be good until further notice or due at maturity (a time loan).” Most federal securities laws do not apply to loans.[1]

There are two main types of loan agreements: bilateral loan agreements and syndicated loan agreements. Bilateral loan agreements take place between two parties (or three in the case of deed of trust situations), the borrower and the lender. These are the most common type of loan agreement, and they are relatively straightforward to work with. Syndicated loan agreements take place between a borrower and multiple lenders, such as multiple banks; this is the agreement commonly used for a corporation to take out a very large loan. Multiple lenders pool their money together to create the loan, thereby lowering individual risk.

How Loans and Mortgages Are Taxed

Loans are not taxable income, but rather a form of debt, and so borrowers pay no taxes on money received from a loan, and they do not deduct payment made toward the loan. Likewise, lenders are not allowed to deduct the amount of a loan from their taxes, and payments from a borrower are not considered gross income. When it comes to interest, however, borrowers are able to deduct the interest they have been charged from their taxes, and lenders must treat interest they have received as part of their gross income.

The rules change slightly when a loan debt is canceled before repayment. At this point, the IRS considers the borrower to have income from the loan. For more information, see Cancellation of Debt (COD) Income.

Currently those with private mortgage insurance (PMI) are able to deduct its cost from their taxes. This rule is set to expire in 2014, and there is currently no sign that Congress will renew the deduction.[2]

Loan vs Mortgage Loan vs Mortgage Loan vs Mortgage Loan vs Mortgage Loan vs Mortgage

Predatory Lending

Loan vs Mortgage

Those seeking to take out a loan should be aware of predatory lending practices. These are risky, dishonest, and sometimes even fraudulent practices carried out by lenders that may harm borrowers. Mortgage fraud played a key role in the 2008 subprime mortgage crisis.[3]