A package mortgage is a type of mortgage arrangement in which the loan principal amount is increased by using both real property (realty) and personal property (personalty) as collateral. This form of financing is often employed by borrowers who need additional funding to cover the cost of both the purchase of the property and the items within it, such as appliances, fixtures, and other personal possessions.
Key Characteristics
Components of a Package Mortgage
Real Property as Collateral
In package mortgages, the primary collateral is typically real estate, such as land or buildings. This forms the bulk of the security for the lender.
Personal Property as Collateral
In addition to real property, personal property, such as household appliances, furniture, or other moveable items within the home, is also pledged as collateral. This increases the security for the lender and the amount available to the borrower.
Loan Amount and Terms
The inclusion of personal property in the collateral allows for a higher principal amount compared to traditional mortgages. The terms, including interest rates and repayment schedules, may vary depending on the lender and the borrower’s creditworthiness.
Historical Context
Package mortgages gained popularity in the mid-20th century, particularly in the United States. They were designed to assist buyers in acquiring fully equipped homes without needing separate financing for personal goods. Over time, as financial instruments evolved, the use of package mortgages declined but they remain a relevant option in certain markets and circumstances.
Applicability and Special Considerations
Advantages
- Increased Loan Amount: Ability to borrow more funds by leveraging both real and personal property.
- Convenience: Simplifies the financing process by combining property acquisition and personal property purchase into one loan.
Disadvantages
- Higher Risk: Increased collateral can mean greater risk for the borrower if they default.
- Complex Valuation: Assessing both real and personal property for collateral purposes can be complex and time-consuming.
Example Scenario
Consider a homebuyer purchasing a house worth $300,000. Alongside the real estate, they also want to include high-end kitchen appliances worth $20,000 as part of the loan. A package mortgage would allow them to finance a total of $320,000, using both the house and appliances as collateral.
Related Terms
- Traditional Mortgage: A mortgage that uses only real property as collateral.
- Personal Property: Movable items owned by an individual, as opposed to real property.
- Real Property: Immovable property such as land or buildings.
FAQs
What types of personal property can be included in a package mortgage?
How do appraisals work for package mortgages?
Are package mortgages available in all regions?
Summary
Package mortgages provide an effective way for borrowers to finance both real estate and the personal property within it through a single, consolidated loan. While they offer unique advantages such as higher loan amounts and convenience, they also come with inherent risks and complexities. Understanding both the benefits and potential pitfalls is essential for anyone considering this type of mortgage arrangement.
References
- Investopedia. (n.d.). Package Mortgage. Retrieved from Investopedia
- The Balance. (n.d.). Understanding Package Mortgages. Retrieved from The Balance
This comprehensive exploration ensures you have a clear understanding of package mortgages, their implications, and their utility in real estate financing.
