Chattel Mortgage

What is a Chattel Mortgage?

A chattel mortgage is a type of mortgage loan used to purchase moveable property. Just like with typical mortgages, you would have to qualify, make a down payment and make monthly mortgage payments to pay back the chattel mortgage. The lender has a lien on your property. Therefore, in the scenario that you fail to make the payments and default on your loan, the lender can take the property and sell it to compensate for what you owe them.

Since the property you are purchasing is movable, it does not include the land that it rests on. This means that you would either have to buy or rent land separately. This can be done through a land lease or land loan. In some cases, the lender will include the rental price of land into your mortgage payments.

Median Chattel Mortgage Characteristics

• Interest Rate: 8.6%
• Loan Term: 23 Years
• Loan Size: $58,672

Source: Consumer Financial Protection Bureau, May 27, 2021

Chattel Mortgage vs Traditional Mortgages

Besides what they are used for, chattel mortgages differ from traditional mortgages in a number of other ways. The table below summarizes these differences between the two.

Use - As mentioned previously, chattel mortgages are used for property that is movable, while traditional mortgages are given out for properties that are fixed on the ground in one place. Typically, when taking out a traditional mortgage, the borrower purchases the property and the land. While with movable property, the borrower would have to separately buy the land or do a land lease.

Mortgage term - Chattel and traditional mortgages also differ in the specific terms of the loan. A 15 vs. 30-year term will affect your interest paid and monthly payment. Chattel mortgages tend to have shorter terms than a traditional mortgage, such as a conforming loan. This means that holding everything else the same, you would be making a larger monthly mortgage payment with a chattel mortgage.

Mortgage Rate - Chattel mortgages tend to have higher mortgage rates than traditional mortgages or HELOC rates. This means that you would pay more in interest. Government-backed chattel loans can offer borrowers lower mortgage rates.

Processing Fees - Chattel mortgages typically have lower processing fees than traditional loans.

Maximum Loan Amount - The maximum amount you can borrow through a chattel mortgage is lower than the maximum amount a traditional mortgage offers. This makes sense since a fixed real estate property would typically cost more than a mobile home, equipment, or vehicle.

Taxes - Fortunately, just like with traditional mortgages, borrowers of chattel loans can deduct the interest payments they make when filing income taxes.

What can Chattel Loans be Used for?

There are different types of movable properties that you can purchase through a chattel mortgage. These include:

Manufactured Homes

A chattel mortgage can be used to purchase mobile homes, also known as manufactured homes. A manufactured home is a factory-built home, made after June 15, 1976. Different departments of the government, such as the Housing and Urban Development Department, the Veterans Affairs Department, and the Department of Agriculture’s Rural Housing Service have programs to cater for chattel loans for manufactured homes. The departments offer these loans to consumers through private lenders.

Modular Homes

A modular home resembles a manufactured home, however, they tend to be more stationary. They are factory-built homes but they are assembled on the site that the home will be located and have a more permanent foundation. Modular homes can sometimes also be financed through conventional loans and they need to follow the same local building codes as regular homes.

Equipment & Machinery

Heavy equipment used for construction or farming, tends to be quite expensive. That is why businesses may choose to take out a mortgage to finance their purchase rather than paying the whole sum upfront. A chattel mortgage can be used to buy these types of equipment. The borrower has the benefit of using the equipment while paying off the mortgage on it.

If they default, the lender takes the equipment and sells it to recover the amount. In order for the business to qualify for an equipment loan, the lender may require that the business have a minimum level of revenue or a minimum number of years of operation.

Some government agencies, such as the U.S. Small Business Administration, guarantee a number of loans given to small businesses. 504 loans, for example, have a maximum loan amount of $5 million for purchases on equipment and machinery.

Vehicles

A chattel loan can also be used to purchase a vehicle. It is mostly used by businesses that operate in countries that have a GST or Goods and Services Tax. By taking out a chattel loan, the owner of the vehicle can claim GST associated costs and depreciation.

Pros and Cons of Chattel Mortgages

The purpose chattel mortgages are used for and their terms, present a number of pros and cons to potential borrowers.

FAQ

As with a regular mortgage, if you default on your chattel mortgage payments, the lender has the right to recover your property and sell it in order to make up for the amount that you still owe them.

You can deduct the interest you pay on a chattel mortgage when filing your income taxes. Borrowers of chattel mortgages for vehicles can also claim the costs associated with the goods and services tax (GST).

You should choose the traditional mortgage. The lower mortgage rate can save you some money in interest. Moreover, if you want to pay it off sooner, you can choose the 15-year mortgage term.

The down payment you will have to make will depend on the lender, the type of loan you are applying for, and factors relating to your credibility as a borrower, such as your credit score.