What is a Chattel Mortgage?

A chattel mortgage is a unique type of mortgage that is used to finance movable personal property, such as a manufactured home, without including the land it sits on as collateral. The property itself acts as security for the loan and can be taken back by the lender if the borrower fails to make payments.

How Does a Chattel Mortgage Work?

When you use a chattel mortgage to purchase property other than real estate, like farm equipment or a mobile home, the property itself serves as collateral until the loan is paid off. In the event of default, the lender can seize the property.

For example, if you use a chattel mortgage to buy a manufactured home, the lender may require the loan to be registered with the Federal Aviation Administration if you're buying an aircraft. Chattel mortgages are often used for manufactured and mobile homes since they can be placed on leased land.

Types of Chattel Mortgages

There are different types of chattel mortgages, such as equipment loans for heavy machinery and loans for purchasing manufactured homes. These loans may have lower origination costs and quicker approval times compared to traditional mortgages, but they can also come with higher interest rates and fewer consumer protections.

Alternatives to Chattel Mortgages

Depending on the type of property you're buying, there are alternatives to a chattel mortgage. For heavy machinery, leasing may be an option to avoid owning the equipment outright. Another option is a traditional mortgage, which allows you to purchase a manufactured home along with the land it sits on.

Pros and Cons of a Chattel Mortgage

Pros of a chattel mortgage include shorter loan terms, lower processing fees, and less stringent credit requirements for FHA loans. However, cons include higher interest rates and limited lender options, especially for manufactured homes.

Overall, chattel mortgages can be a useful tool for financing movable property, but borrowers should be aware of the potential drawbacks and explore all of their lending options before making a decision.