A mortgage is by far the most common choice when you’re ready to buy a house, but that doesn’t mean it’s your only option. Personal loans can be a quick way to drum up extra cash for a down payment or a smaller home. But which should you choose? Sorting through mortgages and personal loans may not be the American dream, but it’s a crucial party of understanding the best financial choice for your future.
How do personal loans differ from mortgages?
There are two major differences between personal loans and mortgages. A personal loan is unsecured, whereas a mortgage uses your house as collateral — if you default on a mortgage, you could lose your home. A personal loan is also for a much smaller amount, which makes it difficult to buy a house with one. Instead, a personal loan is better suited for other costs, like improvements after the house is purchased and new furniture to decorate your space.
The main differences between personal loans and mortgages
Interest rate
Varies by lender, usually between 3.99% to 36%
Varies by lender, but can start as low as 3.2% for a fixed-rate mortgage
Maximum loan amount
Up to $100,000, depending on the lender and your eligibility
High-cost area limit goes up to $954,225 for a single unit
Loan term
Typically between 1 to 7 years
Typically 15 or 30 years, but can be as short as 10 years or as long as 50 years
No down payment. Unlike mortgages, many lenders don’t require you to provide any cash up front when you apply for a personal loan.
Negotiate repayments. You may be able to negotiate your repayments if you’re facing financial hardship or an emergency.
Mortgages
Lower APR. Because the loan is secured with your property, lenders are more likely to offer a low APR.
Prequalification. You can get prequalified and go house shopping with a clear picture of what you’ll be paying every month.
Tax advantages. You can deduct your interest, mortgage points and your real estate taxes from your yearly income tax calculations.
What are the drawbacks of personal loans and mortgages?
Personal loans
Short repayment terms. Most lenders have repayment terms lasting one to seven years.
High interest rates. Since you’re not providing collateral, you’ll likely have a higher interest rate and will need to pay proportionately more in interest over the life of your loan.
Small loan amounts. You’ll only be able to borrow $100,000 if you have impeccable credit. Otherwise, your funding will be limited.
Mortgages
Foreclosure. If you fail to make payments and default on your mortgage, you may face foreclosure and lose your home.
Amount paid. Despite low interest rates, mortgage loan amounts tend to be very large. This means that by the end of your repayment period, you’ll likely have paid tens of thousands of dollars in interest alone.
Payment fluctuations. With an ARM, the payments you make can fluctuate drastically depending on the market.
Which borrowing option is better suited for me?
The better option will depend on your needs as a borrower. Mortgages are the most common option because they’re meant for real estate. You’ll have the choice between a few different options, including mortgages with fixed rates and other mortgages that change with the financial environment. In addition, buying a home outright on $100,000 or less is nearly impossible in most parts of the country. Some lenders will allow you to use a personal loan as a down payment, but otherwise, you’ll have a hard time covering the costs of a purchase.
However, if you’re looking to fill that new home with some furniture, a personal loan is an option to consider. Personal loans can be used for many purposes, which makes them useful when it comes to home improvements or other big purchases.
Using a personal loan as a down payment
Generally, you won’t be able to use a personal loan as a down payment because lenders will ask for proof that you have the funds available to pay yourself. However, if you have no existing debt, some lenders may allow you to use a personal loan and consider it in your debt-to-income ratio when reviewing your application.
If you can’t afford a down payment and won’t be able to use a personal loan, there may be a first-time home buyer program available in your state to help you afford the down payment.
What’s the difference between a personal loan or a remortgage?
Remortgage is another term for refinancing, which is the process of paying off your current mortgage with a second mortgage through a new lender, usually at a lower interest rate or with better terms. Unless you only owe a small amount on your current mortgage and have excellent credit, a personal loan likely won’t be a comparable option.
A remortgage is ideal for specific goals — like lowering the monthly payments on your house or switching from an ARM to a fixed-rate mortgage — while a personal loan is designed to cover costly purchases without restrictions. Approval for both usually depends on a decent credit score and a positive credit history.
Compare personal loans to even more borrowing options
Personal loans can be good for a wide variety of things, but they’re not necessarily the best for funding the purchase of a home. Mortgages are exclusively used for purchasing real estate and can generally offer you better terms. Before you make any big financial commitments, you should talk with a financial advisor and compare your options. Whichever you choose, have your finances in order and understand the full impact of each type of loan when you apply.
Frequently asked questions
You’re typically required to put down at least 3% of the loan amount, but it could be more depending on the lender. A down payment of more than 20% allows you to avoid paying private mortgage insurance (PMI).
Yes. Once you pay down your mortgage to 78% of the original sale price of your home, you can contact your lender to cancel the PMI on your mortgage.
Good credit definitely helps. It is possible to get a mortgage with a low credit score, but you’ll likely face higher interest rates. It may be worth taking steps to raise your credit score before you get a mortgage.
While specific documentation will vary by lender, you’ll typically provide two forms of government-issued ID, verification of your last two years of income, bank statements and proof that you have the funds for closing costs.
In many instances, you can get a personal loan to pay off your mortgage. Keep in mind that many mortgages come with lower interest rates than personal loans. Be sure to evaluate the APR and the final cost of both loans before making a decision to pay off your mortgage with a personal loan.
Aliyyah Camp is a SEO content strategist and former publisher at Finder, specializing in consumer and business lending. Her writing and analysis has been featured in CentSai, the Dough Roller and the Chicago Tribune. She holds a BA in communication from the University of Pennsylvania.
My home has an approximate market value of $350,000 and I have a personal loan of $32 000 at 16% interest payable over 5 years. Would it be better to have a $32 000 mtge at 4.5% interest – considering that the interest may change and that legal fees are involved? Thank you for helping.
As Finder is a financial comparison website providing general information, we are not permitted to provide our users with personalized financial advice or make product recommendations.
Also, this page from our Australia site may be of help to you as it discusses Fixed VS Variable Interest Rate Home Loan may give you an idea on which type you’d like to go for.
You might want to confirm the cost of the mortgage from the lenders directly though. At the end of the day, it would be upon your discretion which one would be best.
Before applying, please ensure that you meet the eligibility criteria and requirements and to read the details, as well as the relevant Product Disclosure Statements/ Terms and Conditions of the option before making a decision and consider whether the product is right for you.
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My home has an approximate market value of $350,000 and I have a personal loan of $32 000 at 16% interest payable over 5 years. Would it be better to have a $32 000 mtge at 4.5% interest – considering that the interest may change and that legal fees are involved? Thank you for helping.
Hey Jenni,
As Finder is a financial comparison website providing general information, we are not permitted to provide our users with personalized financial advice or make product recommendations.
You may want to read this page on our Complete Guide to Comparing Home Loans that discusses the fees involved.
Also, this page from our Australia site may be of help to you as it discusses Fixed VS Variable Interest Rate Home Loan may give you an idea on which type you’d like to go for.
You might want to confirm the cost of the mortgage from the lenders directly though. At the end of the day, it would be upon your discretion which one would be best.
Before applying, please ensure that you meet the eligibility criteria and requirements and to read the details, as well as the relevant Product Disclosure Statements/ Terms and Conditions of the option before making a decision and consider whether the product is right for you.
Best,
Maria