Collateral vs Mortgage
Mortgages and collateral are terms that are closely related to one another and are constantly referred to when discussing loans and lending. Collateral acts as an insurance policy for lenders which can be sold to recover losses when a borrower defaults on their loan. Mortgage is a loan that uses a specific type of collateral; real estate. As explained the two terms are closely related, yet quite different to one another. The following article provides an explanation of what each term means, and clearly shows how mortgage and collateral are related yet quite different to each other.
Collateral
When a loan is taken out, an individual is making a commitment to repay the loan by its maturity and to make interest payments on the principal amount of the loan. However, there is no assurance for the bank that the borrower will repay his loan at all. Due to this uncertainty, the bank must take out some form of an ‘assurance’ so that they will not suffer losses in the event that the borrower defaults on his loan. In order to minimize losses, banks require collateral for the loan.
The collateral can be any asset that has a value equivalent to or higher than the amount of the loan taken out. The borrower will have to pledge the asset as collateral to the bank when the loan is taken out. In case if the borrower defaults from making loan repayments, the lender can seize the asset, sell it and recover their losses.
Mortgage
A mortgage is a loan that is taken out by keeping a real estate asset as collateral. A mortgage will be taken out by a company or an individual who wishes to purchase a real estate asset. Mortgage loans are taken out very frequently for the purchase of a house, and the collateral for the loan will be the house itself. In the event that the borrower is unable to make mortgage repayments, the lender has all the right to seize the asset and recover their losses.
The types of mortgages include; fixed rate mortgages that charge a fixed interest through the life of the loan, adjustable rate mortgages where mortgage interest rates are adjusted from time to time, interest only mortgage for which no principal repayment is made for some time, etc.
Collateral vs Mortgage
Mortgage and collateral are both vocabulary that are used when explaining how banks lend money to borrowers. Collateral is the ‘insurance’ policy for the lender; and asset that is pledged to the bank by the borrower when taking out a loan. There are many different types of loans such a car loan, education loan, personal loans, etc. Mortgage loans are one such type of loan that is usually taken out in order to purchase a real estate asset. Therefore, the collateral for a mortgage loan will be the real estate property that the borrower is trying to purchase.
Summary:
• Mortgages and collateral are terms that are closely related to one another and are constantly referred to when discussing loans and lending.
• Collateral acts as an insurance policy for lenders which can be sold to recover losses when a borrower defaults on their loan.
• A mortgage is a loan that is taken out by keeping a real estate asset as collateral. A mortgage will be taken out by a company or an individual who wishes to purchase a real estate asset.