Find out what makes a difference when you’re looking to buy a home.
An alternative financing tool for your home purchase is a personal loans. You can use these loans for almost any legitimate reason, as long as you qualify. You’ll generally need good to excellent credit for a personal loan, but you’ll find lenders that specialize in loans for those with less-than-perfect credit. You’ll also find both secured and unsecured personal loans.
Mortgages, however, are specialized lending for real estate. When you take out a mortgage, you’re taking out a secured loan — with the property you’re buying as the collateral. Though several types of mortgages are available, the best knownare fixed-rate 15- and 30-year mortgages.
In this guide, we sift through the nuances of both loan types to help you better understand their benefits and drawbacks.
Personal loans through Prosper
You could borrow up to $35,000 for a variety of purposes, with rates from 5.99-35.99%.
- Recommended Credit Score: 640 or higher
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: $35,000
- Loan Term: 3 or 5 years
- Turnaround Time: 1-3 business days
- Simple online application process
- No prepayment penalties
How do personal loans differ from mortgages?
You can take out personal loans from sources that include banks, credit unions and peer-to-peer (P2P) lenders. Student loans, unsecured personal loans and auto loans are just a few of the types available when it comes to personal lending.
Mortgages come in a few different types as well. Fixed-rate — or “traditional” — mortgages come with predictable fixed payments that don’t vary throughout the life of the loan. An adjustable-rate mortgage (ARM) is slightly different in that the initial interest rate is usually low and fixed at the start of the loan. After the fixed period ends, ARM interest rates then begin fluctuating with the market over the remainder of the loan.
You’ll also come across interest-only mortgages and payment-option ARMs, but these types of mortgages are fussier and could lead to financial trouble if you’re not careful.
Main differences between personal loans and mortgages
|Interest rate||Varies among lenders, usually between 3.99% to 36%||Varies among lenders, 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 one and seven years||Typically 15 or 30 years, but can be as low as 10 years or as high as 50 years|
|Repayment frequency||Usually monthly repayments||Usually monthly repayments|
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What are the benefits of personal loans and mortgages?
- No tax implications. You won’t be charged income tax on the amount you borrow unless the debt is forgiven by the lender, and even you’ll find several exceptions.
- Borrow a significant amount. Depending on the lender and your qualifications, you may be able to borrow upward of $100,000.
- Repayment terms. Repay your loan over a period of one to seven years, depending on the lender.
- Negotiate repayments. You may be able to negotiate your repayments if you’re facing financial hardships or emergencies.
- Secured. Because the loan is secured with your property, lenders are more likely to offer a better APR.
- Pre-qualification. You can get pre-qualified and go house shopping with a pretty clear picture of what you’ll be paying every month.
- Tax advantages. You can deduct your interest, mortgage points and your real estate taxes to reduce your taxable income.
What are the drawbacks of personal loans and mortgages?
- Good to excellent credit required. Higher dollar loans typically require a higher credit score. It’s not the only determining factor, but it does significantly influence approval decisions.
- Interest rates. Interest is charged on the principal amount of the loan. Depending on the APR and loan term, you could end up paying thousands of dollars more than the original amount borrowed.
- Fees. You could face unexpected fees — like origination fees and repayment penalties. It’s important to read over the entirety of the loan agreement to avoid any surprises.
- Impacts your credit score. If you fail to make payments or default on the loan, it could negatively affect your credit.
- Foreclosure. If you fail to make payments and default on your mortgage, your lose your home in foreclosure.
- 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 with the market.
Which borrowing option is better suited for me?
Buying a home outright on $100,000 or less is nearly impossible in larger cities. 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 make them useful when it comes to home improvements or other big purchases.
Because it’s strictly for real estate, a mortgage loan will be at the top of your research list when you’re looking to buy a home. Fixed rates can make for an easy repayment plan, even if it doesn’t have as attractive an initial interest rate as an ARM. If rates drop significantly, you can take steps to refinance a fixed-rate mortgage.
Personal loan vs. remortgage
You might have come across a “remortgage” in your research. A remortgage is another term for refinancing. When you remortgage or refinance your mortgage, you pay off your current mortgage with a second mortgage through a new lender, usually one offering a lower interest rate or better terms.
While refinancing can sound complicated, it’s common practice for people who have improved their credit over time or live in areas of high real estate fluctuation. If your home’s value has increased or you’ve simply found a lender offering a better deal than your current mortgage, you can typically save thousands of dollars in interest over the long term while reducing your monthly payments.
This refinancing or remortgaging process is more similar to taking out a mortgage than borrowing money with a personal loan. If you’re happy with your current mortgage but need a loan for home improvements or other big expenses, you might want to consider a home equity loan or line of credit instead. These options are like personal loans, except your repayment period is spread out over 15 to 30 years, rather than a personal loan’s average 1 to 7. In addition, a home equity loan is secured against your house, meaning the interest rates can be lower that a personal loan’s.
When choosing between a remortgage and a personal loan, the better option depends entirely on what you need the loan to do. 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 history of timely payments.
Can I use a personal loan for my down payment on a house?
With many mortgage lenders, you won’t be able to use a personal loan for your down payment. Many mortgage lenders will ask for proof that you have the funds available to pay for your down payment. 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 considering your pre-qualification application.
Keep in mind that there may be first-time homebuyer programs available in your state. This could help you afford the down payment on a home.
Personal loans can be good for a wide variety of things but not necessarily funding the purchase of a home. Mortgages are exclusively for purchasing real estate.
Whether you’re taking out a personal loan for a major purchase or you’re getting a mortgage for a home, borrowing money is a big financial decision that shouldn’t be taken lightly. You should read and understand all terms and conditions of the loan you’re interested in to avoid getting caught off guard by extra fees and expenses.
It’s important not to take out a loan or mortgage that you can’t afford to repay. Failing to repay a personal loan could damage your credit. In the case of a mortgage, you could lose your home in addition to damaging your credit if you fail to repay.
Before you make any big financial commitments, you could talk with a financial advisor, compare your options and even talk with a trusted friend. Going into this decision with a level head can ensure that you can enjoy your home for years to come.
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