Tuesday, January 19, 2010

Mortgage vs Loan

Very often the terms mortgage and home loan are used interchangeably. Although it might not cause big harms but understanding the difference may bring positive impact to your personal finance ie. in Property Investment.

In fact, mortgage is the opposite of loan.

When you need extra money, someone can lend you some and in return they gain profit when you repay them. The lender may ask for collateral like your house so that if you don't repay them, they can take possession of your house, sell it and still earn a profit by doing so. They give you a loan.

If you have something valuable and you want to exchange it temporary for some money, you can prove to people how valuable your possession is and why should they give you money for it. You get your money if the lenders are satisfied their interests will be taken care of. You have just mortgaged your belongings.

Loan is a lender's contract,
mortgage is a borrower's contract.

At one instance, it may seems the same. Its just a story told from different angles. But if you think for a moment as a borrower, do you want to follow your lender's contract or should you come up with your own's ?

If you start thinking the whole money borrowing thing from your own angle and for your own interest, you may just come up with some unique and interesting arrangements.

Items that can be mortgaged are not limited to your own properties. If you are holding some collaterals from other people, you can mortgage them to higher bidders.

You don't have to mortgage 100% of your property. Since it is really up to you, you can even split a single property to 4 different mortgages and borrow money from different sources. However, you would need some very good reasons why people still want to lend you the money. But if it is a 4 sections building, it wouldn't look that ridiculous anymore, would it ?

Item that can be mortgaged does not even need to be mortar. An idea or a method can be mortgaged too. As long as someone believe in your value judgement and their interests taken care of, they can lend you money. So you can literary mortgage your property for money without giving it out as a collateral at all. Especially applicable when you are earning revenue from such properties.

Loan or Mortgage ?
Borrower or Mortgagor ?
Lender or Mortgagee ?

As mentioned earlier, this is just a matter of how the story is told. Do you want others to control your story or do you want to tell your owns ?