When it comes to financing the purchase of a home or carrying out major renovations, the question arises between opting for a mortgage or a personal loan. Each option has characteristics, advantages and limitations that can influence the final decision. In addition, a mortgage loan, although less common, is also an option to consider. In this article, we analyze the differences between these options to help you choose the best alternative.
When to choose a mortgage and when a personal loan?
Deciding between a mortgage and a personal loan depends primarily on the amount of money you need and what you will use it for:
• Personal loan : Ideal for smaller amounts, usually up to 50,000-75,000 euros, and to cover specific needs such as a renovation or a major purchase. Repayment periods are usually shorter, up to 10 years, which increases monthly payments but allows you to pay less total interest.
• Mortgage : This is the best option when you need a larger sum, such as for a home purchase. With a mortgage, repayment terms can be extended up to 30 years, which reduces the monthly payment, although it involves more interest over time. However, the application and approval process is more complex.
What is a mortgage loan and how is it different from a home loan?
Although both products are intended for the purchase of a home, there are key differences between a mortgage loan and a home loan:
• Mortgage loan : In this case, the bank pays the total amount of money in one go and the client agrees to return the capital plus interest in monthly installments. The property serves as a guarantee of payment, so that if the client cannot meet the installments, the bank can execute the mortgage.
• Mortgage loan : This works in a more flexible way, allowing the holder to draw on the capital gradually as needed. It is similar to a line of credit, where the client can reuse the repaid money as long as it does not exceed the agreed limit. This makes it suitable for those who need to finance a project in phases, such as an extensive renovation.
Advantages and disadvantages of a mortgage versus a personal loan
Each option has pros and cons that must be evaluated before making a decision:
• Advantages of the mortgage:
either Lower interest: The interest on a mortgage is usually much lower than that of a personal loan, making it more affordable for larger amounts.
either Long terms: Since the loan can be extended up to 30 years, the monthly payment on a mortgage is lower, which alleviates the monthly financial burden.
• Disadvantages of the mortgage :
either Higher total cost: Even though the monthly payment is lower, the long term means that more interest is paid over the life of the loan.
either Complex procedures: Applying for a mortgage requires a property appraisal and a longer approval process.
• Advantages of personal loans :
either Speed and simplicity: The procedures are more agile and do not require guarantees such as a home.
either Suitable for smaller amounts: It is an effective option if the financing need is limited, such as renovations that do not exceed 50,000 euros.
• Disadvantages of personal loans :
either High interest: Since the term is shorter and there is no real guarantee such as a property, the interest is higher.
either Higher monthly payments: Due to the shorter terms, the monthly payment may be significantly higher than with a mortgage.
Mortgage or home loan? Which one to choose?
Both products have features that can be useful in different scenarios:
• Traditional Mortgage : Recommended for the purchase of a primary residence, especially when seeking a long-term loan with predictable and stable payments.
• Mortgage loan : Most useful when you need flexibility to have access to money as certain projects are developed, such as a complete renovation or gradual improvement of the home. However, it usually has higher interest rates and commissions for unused money, which makes it less convenient for those who do not need such broad flexibility.
Conclusion: What to choose according to your needs?
The decision between a mortgage, personal loan or home loan will depend on the amount of money you need, your ability to pay and the nature of the project you want to finance. While a mortgage offers the possibility of financing large amounts over the long term with low interest, a personal loan can be faster and suitable for more limited needs. A home loan, on the other hand, can be useful if you need flexibility in the availability of money.