When you’re planning on buying a house, a mortgage may be the first thing that comes to mind, but it’s not the only option. If all you need is extra cash for a down payment or a smaller property the quick way can be turning to personal loans instead. To better understand how either of the options affects your financial future, you’ve got to compare them, even though it’s not too easy.
What is the difference between personal loans and mortgages?
First of all, a personal loan is unsecured, while a mortgage would use your property as collateral, so it’s possible to lose your home if you default on a mortgage. A personal loan also provides you with a smaller amount of money, so it’s not enough to buy a house with just that. It’s best to take out, say an $8,400 loan and use it for improvements, decorative works and furnishing your newly bought property.
Note, that the figures shown in the above table are the general ones. Each individual case depends on the provider and your eligibility. For example, terms on some mortgages can be much shorter, than the above-mentioned, starting from just 10 years, or much longer, up to 50 years.
Advantages and disadvantages of personal loans and mortgages
To compare two ways of obtaining the needed financing, you’ve got to clearly see the upsides and downsides of each method. Let’s dive into it.
- No income tax on the sum you’ve borrowed unless the debt is forgi
- There is no down payment. You don’t have to provide any money r
- ight away, unlike with the mortgages.
- Repayments are negotiable. If you’ve got a case of a financial emergency you can talk to your provider and negotiate the payments.
- Repayment terms are very short – from 1 to 7 years.
- The interest rates are very high, because there’s no collateral.
- The amount you can count on is much smaller than with the mortgage. If your credit history is stellar, you can borrow up to $100,000, but if it’s not – even less. If you’re looking to take out a loan with a poor credit history – try visiting Bad Credit Loans in Colorado.
- Lower APRs due to the added security, that you provide by giving your property as collateral.
- You can apply for prequalification to get an idea of what terms and payments you can count on.
- Your interest, mortgage points, and real estate taxes are deductible from the yearly income tax calculations.
- Failure to make payments will strip you of your property.
- Mortgage sums are large, so even with low interest rates, you’ll end up paying thousands of dollars by the end of your terms.
- The sum of the payments can fluctuate greatly depending on the market.
What borrowing option should I choose?
You’ll have to calculate your expenses to answer such a question. You might go with a personal loan if you’ve already got some sufficient savings to cover your property purchase, or if you’re planning on using it for add-ons to your new house, like buying furniture or getting remodeling works done. You can also use a personal loan as a down payment for a mortgage. The latter is more common in real estate business, and there are also a couple of options available to choose from, like mortgages with fixed rates.
Let’s talk more about using a personal loan as a down payment. It’s not a common practice, and not all lenders would let you do that, as they need an assurance, that you have the funds available to pay yourself. Some providers can consider a personal loan in your debt-to-income ration during the application process if you have no debt. You can take out a $7,500 loan and use it for such purposes.
But if your provider refuses to let you do so, and you don’t have enough money for a down payment, you might consider using a first-time homebuyer program available in your state.
What’s a remortgage?
Remortgage is the same as refinancing, the term which describes repaying your current mortgage with a second mortgage with the help of a new lender. Usually, this new lender would give you lower rates or better terms. It is a great idea if you want to make the monthly payments on your house lower or switch to a fixed-rate mortgage.
A personal loan cannot be compared with this type of financing, unless you have to repay a small amount and have excellent credit, though, both require a good credit score and a decent credit history. If you’ve got a poor record and are looking for a personal loan, try Bad Credit Loans in Maryland, you might find a fast solution to your problem there.
Before signing any papers, it’s important to go through your budget, preferably with a financial advisor and compare different options of mortgages. Those can offer you better terms, then personal loans. Still, don’t toss the latter aside, just because you can’t use it to purchase a property. There’s still a lot of expenses you might cover with it.
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