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Chattel Mortgage And Types: A Complete Guide One Should Know

Chattel Mortgage and Types: A Complete Guide One Should Know

Amanda Byford
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What is Chattel Mortgage

If a borrower is looking to purchase a movable piece of equipment or modular home, then a chattel mortgage could turn out to be a good option. 

When a borrower wants to purchase a home that isn’t permanently attached to the land then this type of loan is often used.

A loan process where an object of the movable personal property acts as security for a loan is called a chattel mortgage. 

The loan is guaranteed by the movable property, or chattel, and the lender holds an ownership interest in it. 

In a conventional mortgage, the loan is secured by a lien on the real stationary property, but a chattel mortgage is different from it.

In some areas of the U.S., chattel loans are referred to as security agreements. 

The chattel mortgage is addressed by different names like personal property security, a lien on personal property, and sometimes as ‘movable hypothec’ in other parts of the world.

Understanding Chattel Mortgages

Manufactured homes, vehicles, airplanes, boats, farm equipment, are some examples of assets that are often financed using chattel mortgages.

There are specific rules for these mortgages on personal property. 

For instance, before entering into financing agreements with prospective borrowers who want to put the property up as security for another loan chattel loans must be registered in a public registry so that third parties can be aware of it. 

There is also a recording with the Aircraft Registration Branch of the Federal Aviation Administration for the security agreements associated with aircraft.

Difference Between a Chattel Mortgage and a Traditional Mortgage

In a traditional mortgage, the lender can take possession of the property that serves as collateral when a conventional loan is in default. 

While with a chattel mortgage the legal relationship is reversed.

In a chattel loan, the lender does not hold a lien against the movable property. 

Instead, there is a transfer of conditional ownership of the chattel until the loan has been repaid back. 

At that point, the borrower resumes full control and ownership of the chattel.

Different Types of Chattel Mortgages

Mobile Homes

To finance mobile homes which are situated on leased land, chattel mortgages are frequently used. 

Because the land doesn’t belong to the mobile homeowner a traditional mortgage can’t be used. 

The mobile home is considered “personal movable property,” and a chattel mortgage can be used to serve as security for the loan.

Even if the mobile home is moved to a different location still the financing arrangement remains valid.

Equipment Loans

Chattel mortgages are frequently used by businesses to purchase new equipment.  

Heavy machinery has a long lifespan, and its purchase can be financed over some time by the seller, who in the event of default will want to keep a security interest in the machinery.

Along with maintaining a safe position for the seller at any given time, a chattel mortgage allows the buyer to use the equipment. 

If the buyer defaults then the seller can recover the equipment and sell it to recover losses from the loan balance.

Pros and Cons of Chattel Loans

Depending on the borrower’s financial situation, taking out a chattel loan could make sense. But before applying it’s important to know all the facts.

Pros of Chattel Mortgage

Some of the biggest advantages of taking out a chattel mortgage are:

  • Compared to a conventional or a traditional mortgage chattel mortgages come with shorter loan terms.
  • The processing fees of chattel loans usually are lower.
  • Depending on a borrower’s monthly cash flow the repayments can be fixed-rate or structured.
  • The interest on the loan is tax-deductible.

Cons of Chattel Mortgage

Some drawbacks to taking out a chattel mortgage are:

  • The lenders of Chattel mortgage charge higher interest rates than what a traditional mortgage would offer.
  • If the borrower fails to make payments they can lose their property to the lender.

The Tax Implications of a Chattel Mortgage

A borrower is entitled to claim an input tax credit for the goods and services tax on a vehicle or personal property. 

The borrowers can claim interest or depreciation costs.

What would a Chattel Mortgage Cost?

The chattel mortgage interest rate is higher than other typical mortgage loans available.

A chattel mortgage fee is approximately 2% to 3% of your loan amount. Then you have a down payment, handling fee, and sometimes even one month of advance payment is applicable.

Conclusion

In mobile homes where only the trailer is bought by the owner but not the land, these loans are often financed with chattel mortgages.

A chattel mortgage may be used to buy heavy business equipment by a company’s owner.

Compared to traditional mortgage loans, chattel loans are often more expensive and shorter-term period.

Amanda Byford

Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.

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