Property financing may seem simple but it’s more complicated than meets the eye. When it comes to real estate financing there are two key types of loans you can encounter depending on the property: chattel loans and traditional mortgages.
These may seem similar at first glance, but there are significant differences that can affect their structure, legal implications, and suitability for your needs.
This article is specifically designed to remove the mysteries behind these two loan types and clarify what you need to purchase your home.
What is a Chattel Loan?
You’ve likely encountered a chattel loan before and may actually have one under your name already. Chattel refers to any moveable property1, so your cars used for business, other vehicles, mobile homes, and machinery.
Chattel loans hold the moveable property in collateral, meaning the lender holds an interest in the moveable property as security for the loan. Much like many lenders will hold the title to a car until the loan is paid off, if you default on this loan, the lender may seize the unpaid property and sell it to recover their money.
There is quite a range of properties that can fall under the auspices of a chattel loan. For instance, mobile homes, manufactured homes that aren’t permanently attached to land, boats, aircraft, and heavy machinery. Businesses may use chattel loans to purchase new industrial equipment, like farm machinery. Individuals might use a chattel loan to purchase a mobile home.
What is a Traditional Mortgage?
This is the loan we most often refer to simply as a mortgage. It’s specifically used to purchase real estate. When an arrangement is made with a lender, the borrower agrees to pay back the loan over a set period of time (average is 30 years) while the lender earns interest2.
With a traditional mortgage, the loan is secured by the real estate property. If the borrower doesn’t pay the loan as agreed, the lender can take possession of the real estate.
The property that qualifies for a traditional mortgage is a little more narrow field. This includes residential homes, vacation homes, or investment properties. It can also include commercial buildings like office spaces, retail stores, and industrial properties.
Key Differences Between a Chattel Loan and a Traditional Mortgage
Ownership and Lien
With a traditional mortgage, the borrower still holds the title and deed to the real estate property; there is a lien placed against the property in favor of the lender. The lien must be satisfied before the borrower gains any funds from a sale.
With a chattel loan, the lender holds the title to the moveable property until the loan is paid off. The title is then transferred officially to the borrower when the loan is paid in full.
Loan Terms
While traditional mortgages can be as short as 10 years, they’re typically longer and range from 15 to 30 years3. These are accompanied by fixed or variable interest rates.
Chattel loans are often shorter, not usually exceeding 15 to 20 years. Since they are perceived as being higher risk as the property can be moved, they are usually accompanied by higher interest rates.
Legal Framework
The foreclosure process for traditional mortgages involves the court system. It requires the lender to process a judgment against the borrower in order to repossess the property and then sell it4.
Chattel loans are less complex. Foreclosures tend to happen quicker as the property can be seized more easily and without the court system as the lender holds the title.
Uses
Perhaps the largest difference we laid out above is the property covered under each type. The traditional mortgage is only for stationary property. It’s suited for long-term real estate investments.
Chattel loans are for property that can be easily moved. They’re also an option for borrowers who want their loans approved faster and with shorter repayment times.
Advantages and Disadvantages
Chattel loans offer quicker processing and flexibility. The downside is the higher interest rates and shorter terms which means higher monthly payments.
Traditional mortgages provide for longer repayment periods and lower interest rates. These benefits come with a more complex approval process and the risk of property foreclosure.
Conclusion
Chattel loans and traditional mortgages serve different needs and properties. While chattel loans cater to moveable properties, traditional mortgages are for your standard real estate purchase. The choice between these two property financing options hinges on the borrower’s needs, circumstances, property type, and long-term financial goals. Each borrower needs to carefully consider their unique situation to select the type of mortgage that aligns best with their needs and objectives.
Sources
- https://www.investopedia.com/terms/c/chattelmortgage.asp#:~:text=A%20chattel%20mortgage%20differs%20from,the%20event%20of%20a%20default.
- https://www.consumerfinance.gov/owning-a-home/loan-options/conventional-loans/
- https://www.bankrate.com/mortgages/what-is-a-conventional-loan/
- https://www.hud.gov/topics/avoiding_foreclosure/foreclosureprocess