Introduction
When financing a real estate purchase, most people think of traditional mortgages that cover only the home and the land it sits on. However, there are alternative mortgage structures that bundle additional assets into the loan. One such option is a package mortgage, which includes not only real property but also personal property.
This article explains package mortgages in detail, including their definition, advantages, disadvantages, examples, and comparisons with other types of real estate financing.
Table of Contents
What is a Package Mortgage?
A package mortgage is a type of real estate loan that includes both the real property (land and buildings) and personal property (appliances, furnishings, and other movable assets). This financing method is common in resort properties, furnished condominiums, and businesses where equipment is necessary for operation.
For example, if a buyer purchases a fully furnished condo with kitchen appliances, furniture, and décor included, a package mortgage allows them to finance the entire purchase with a single loan rather than taking out separate financing for personal property.
How Package Mortgages Work
Package mortgages function similarly to conventional mortgages, with some key differences. The loan amount is based on the combined value of the real and personal property, increasing the principal. The borrower makes monthly payments covering both components, and the lender retains a security interest in both until the loan is paid off.
Key Features:
- Covers both real property and personal property
- Common in residential and commercial real estate
- Usually requires a higher down payment than traditional mortgages
- Can have different interest rates than conventional loans
Example of a Package Mortgage with Calculation
Let’s assume a buyer wants to purchase a vacation home that comes fully furnished:
- Home price: $400,000
- Furniture & appliances: $50,000
- Total loan amount: $450,000
- Down payment (20%): $90,000
- Loan balance: $360,000
- Interest rate: 5%
- Loan term: 30 years
Using the standard mortgage formula: M=Pr(1+r)n(1+r)n−1M = P \frac{r(1+r)^n}{(1+r)^n – 1}
where:
- MM = monthly payment
- PP = principal ($360,000)
- rr = monthly interest rate (5%12=0.004167\frac{5\%}{12} = 0.004167)
- nn = number of months (30 × 12 = 360)
Plugging in the values: M=360,0000.004167(1.004167)360(1.004167)360−1≈1,933.28M = 360,000 \frac{0.004167(1.004167)^{360}}{(1.004167)^{360} – 1} \approx 1,933.28
So, the monthly payment would be $1,933.28. This amount covers both the real estate and personal property.
Advantages of a Package Mortgage
Convenience
A package mortgage simplifies financing by combining the home and personal property into one loan, eliminating the need for separate financing.
Lower Interest Rates
Since mortgage loans generally have lower interest rates than personal loans or credit cards, financing personal property within a package mortgage can be more cost-effective.
Increased Purchasing Power
Buyers can afford more valuable properties with included furnishings, making them move-in ready without additional out-of-pocket expenses.
Disadvantages of a Package Mortgage
Higher Loan Amount
Since the loan includes personal property, the borrower takes on a higher principal balance, which can increase monthly payments and total interest costs.
Depreciation Risk
Unlike real estate, personal property depreciates quickly. If the borrower defaults, the lender may have difficulty recovering the full value of the personal assets.
Limited Availability
Not all lenders offer package mortgages, and some may have stricter requirements, such as higher down payments or more rigorous credit standards.
Comparison: Package Mortgage vs. Traditional Mortgage
| Feature | Package Mortgage | Traditional Mortgage |
|---|---|---|
| Includes Personal Property | Yes | No |
| Loan Amount | Higher | Lower |
| Interest Rate | Can Vary | Typically Lower |
| Depreciation Risk | Higher | Lower |
| Availability | Limited | Widely Available |
| Common Uses | Furnished Homes, Resorts, Businesses | Standard Home Purchases |
Package Mortgage vs. Chattel Mortgage
Another financing option that includes personal property is a chattel mortgage, which differs from a package mortgage in key ways:
| Feature | Package Mortgage | Chattel Mortgage |
|---|---|---|
| What’s Financed | Real & Personal Property | Personal Property Only |
| Collateral | Real Estate & Personal Property | Only the Personal Property |
| Interest Rates | Lower | Higher |
| Typical Use | Homes with Appliances, Businesses | Manufactured Homes, Boats, Equipment |
When to Use a Package Mortgage
A package mortgage is ideal when:
- Purchasing a turnkey property with all furnishings included
- Buying a resort home or vacation rental where furniture is necessary
- Acquiring a business property that requires equipment
Legal Considerations
Buyers and sellers should carefully review loan agreements to ensure:
- The personal property is properly appraised and valued
- The lender’s security interest is clear
- There are no restrictions on financing personal property with the mortgage
Conclusion
A package mortgage offers a convenient way to finance both real estate and personal property under a single loan. While it can be beneficial for certain buyers, it comes with added complexities, such as depreciation risks and higher loan amounts. Understanding how package mortgages work and comparing them with traditional options helps buyers make informed decisions about their real estate financing.
For those considering a package mortgage, consulting with a mortgage professional can clarify specific terms and conditions, ensuring the financing structure aligns with long-term financial goals.
