How Does a Home Mortgage Differ From a Land Mortgage?
In most cases, saving up money to purchase a piece of land or a built-up house unit can take a lot of time. Thus, most people seek a suitable finance tool that can help them pay off the cost of a house/land while they enjoy living on the property. A mortgage is one such tool that allows you to pay for the property while you enjoy using it.
However, the market is stuffed with various types of mortgage loans, and you may be overwhelmed when it comes to deciding which one will work the best for you.
In this article, you’ll learn about home and land mortgages and the difference between the two. Also, if you’re keen to know whether or not you can get a mortgage for land, save yourself some time and visit this page.
What is a mortgage?
A mortgage is a lending instrument or loan that you can borrow from a lender to finance the purchase of a house or land. Like any other type of loan, a mortgage also requires you to repay the borrowed money within the due course of time, along with the interest you agreed upon to pay at a fixed rate.
Some land loans do not require you to provide collateral but have higher interest rates, short repayment terms, and substantial down payment requirements.
On the other hand, a mortgage will ask for the collateral, but you can expect a more extended repayment schedule and lower interest rates. In a nutshell, a mortgage is a long-term loan with an extensive lending sum that you can get to purchase a property.
How does a mortgage work?
People apply for a mortgage when they face fund shortages for purchasing a house. You can apply for a mortgage from either a private lender or a financial institution by providing collateral against the same. However, the interest rate, repayment schedule, and loan term may vary depending on your lender.
Regardless of the lender, mortgages have similar components and more or less work on similar principles. For example, the monthly payment you make against the amount you borrowed is typically divided into four parts:
Principal
It is the actual amount you borrowed as the mortgage. The initial equated monthly instalment will consist of a much lesser portion of the principal amount than those at the later stages of your repayment, where the significant part of your instalment consists of the principal.
Interest
This is the amount accumulated over the principal and calculated against a fixed rate for the entire loan term. Contrary to the principal, a considerable part of your initial repayment will be the interest. It will, however, diminish down the line.
Tax
Each of your equated monthly instalments shall also consist of 1/12th part of your annual property tax.
Insurance
Your lender will require you to purchase a homeowner’s insurance or include the same cost with your loan amount and deduct the equated monthly instalment for the same. In addition, it will cover your home against hazards of fire, theft, and other accidents.
Differences between home and land mortgage
Here’s how a home mortgage differs from a land mortgage on the grounds of purpose, limit, length, and risk:
Purpose
The main difference that sets land and home mortgages apart is their respective utilities. A land mortgage allows the borrower to purchase a piece of land that can be developed for personal or commercial purposes. It mainly covers the purchase cost of the land.
On the other hand, a home mortgage allows the borrower to purchase a build-up house unit along with the land that it’s built upon. You will, however, have to provide collateral in both cases.
Limit
It should be obvious that a piece of land with a house constructed on it will be costlier than an empty plot. It also means that the collateral for a home mortgage is worth much more than it is for a land mortgage. Therefore, the limit of a home mortgage is typically higher.
Moreover, it’s not easy to assess the value of an empty plot; hence you may get a lower loan-to-value finance ratio for your property.
All in all, you’ll get a higher loan limit, lower interest rate, and longer repayment schedule for a home mortgage as compared to a land mortgage.
Risk
The risk involved with a mortgage on land is much higher than that with a traditional home mortgage. While obtaining a land mortgage, the lenders require you to furnish 20 to 50 percent of the total purchase cost as a down payment since there is no home on the land to act as collateral.
On the other hand, the down payment requirement for a home mortgage is around 10 to 20 percent only.
For instance, say the down payment requirement is 30 percent. So, you will have to pay a down payment of $150,000 for a mortgage on land worth $500,000. Whereas, with a down payment requirement of 10 percent, the down payment for a home mortgage in the same case shall be $50,000.
Thus, if you default on the payment, you will lose more money in the case of a land mortgage.
Length
Lenders require a huge down payment for a mortgage on land along with higher interest rates and a shorter repayment cycle due to the associated risks and higher default rates. Usually, the maximum term of a land mortgage is around fifteen years.
A traditional home mortgage has lower down payment requirements–the repayment schedule can span over as much as 30 years. The reason behind it is the collateral, i.e., the home itself. If the borrower defaults on the repayment, the lender can evict them and sell the house to cover the losses.
Endnote
Choosing the right type of mortgage mainly depends upon whether you want to buy a land plot or land with a house on it. Either way, it’s imperative to understand how a mortgage works and whether or not the mortgage you choose will suit your requirements.
Having learnt the main differences between a land and a home mortgage, you can now easily determine which one is better for you. If you’re still muddled, consult an expert that’ll guide you every step of the way.