Chattel Mortgage: What Is It And Should You Use One?
There are a lot of options when it comes to purchasing real estate. But with so many financing choices available, it can be hard to know which is the best for your situation.
If you’re looking to purchase a movable piece of equipment or modular home, a chattel mortgage may be a good option for you. This type of loan is often used by borrowers who want to purchase a home that isn’t permanently attached to the land. Our friends at Rocket Mortgage® do not offer these types of loans.
Read on to learn more about chattel mortgages and what they're used for, as well as the pros and cons for this type of loan.
Chattel Mortgage Definition
If you’ve ever taken out a traditional mortgage, then you know that a fixed property secures the loan. By comparison, a chattel mortgage is a loan that’s secured by a movable piece of personal property.
Many people use vehicles, equipment, or even manufactured homes as collateral on the loan. Depending on where you live, a chattel mortgage may also be referred to as a security agreement.
These types of loans typically come with shorter terms and smaller loan amounts. However, the interest rates tend to be much higher than what you’d receive on a traditional mortgage.
What Is A Chattel Mortgage Used For?
Here are some common scenarios when it makes sense to take out a chattel loan. Chattel mortgages are used in these instances because the borrower doesn’t own the land the manufactured or modular homes are on. The mortgage remains intact even when the home is moved to a different location.
Chattel mortgages are often used to finance manufactured homes, formerly known as mobile homes. A manufactured home is a factory-built home constructed after June 15, 1976.
While our associates at Rocket Mortgage don’t offer chattel mortgages for manufactured homes, they do offer loans for manufactured homes if the home is permanently affixed to the land as real property.
Borrowers can also take out a chattel mortgage to purchase a modular home. These homes are built in factories but are put together in sections and then fully constructed on-site. They adhere to the same building codes as traditional homes. Please note that Rocket Mortgage offers financing for modular homes as well.
Individuals or businesses can also use chattel mortgages to purchase heavy movable equipment. This arrangement allows the borrower to begin using the equipment while still making the most of their cash flow.
Pros And Cons Of Chattel Mortgages
Depending on your current financial situation, taking out a chattel loan could make sense for you. But it’s important to know all the facts before you apply.
Chattel Mortgage Pros
Let’s look at some of the biggest advantages of taking out a chattel mortgage:
- Chattel mortgages typically come with shorter loan terms than with a traditional or conventional mortgage.
- Chattel loans usually have lower origination fees.
- Repayments can be fixed-rate or structured to a borrower’s monthly cash flow.
- The interest on the loan is tax-deductible.
Chattel Mortgage Cons
Here are some drawbacks to taking out a chattel mortgage:
- Chattel mortgage lenders typically charge higher interest rates than what you’d receive on a traditional mortgage.
- The borrower can lose their property to the lender if they fail to make payments.
- Chattel mortgages are harder to obtain due to this type of loan not being offered by many lenders.
- The borrower may face higher monthly payments due to a shorter loan term.
Chattel Mortgage FAQs
Let’s take a look at some frequently asked questions regarding a chattel mortgage.
What happens if you default on a chattel mortgage?
If a borrower defaults on a chattel loan, the creditor or lender can take possession of the personal property. This means that if you run into hard times financially, you could end up losing your home.
Are there any tax implications of a chattel mortgage?
The goods and services tax (GST) on a vehicle or personal property entitles the borrower to claim an input tax credit. Borrowers are also free to claim interest or depreciation costs.
Do chattel mortgage lenders own my personal property?
With a chattel mortgage the lender holds an interest in the property as security/collateral for the loan. This would typically be considered a lien, for example buying a vehicle with using a secured loan. The title is still held by the buyer. However, the lender has a lien on the property that stays until the loan is paid off in full.
The Bottom Line
If you’re looking to buy a modular home or movable piece of equipment, taking out a chattel mortgage could be right for you. These loans come with shorter terms and much lower processing fees. However, the interest rate will be higher than what you’d receive on a conventional mortgage.
Ready to begin your home buying journey? Get started with the mortgage process online.