Many individuals dream of becoming homeowners, but acquiring a home is complex and requires assistance. In addition, buying a home is a substantial financial investment, and it’s easy to become overwhelmed when making critical financial decisions. When purchasing a home, you have various financial alternatives to choose from, and you must pick one that meets all of your requirements.
One of the most common questions people finds themselves asking when purchasing real estate is what loan option they should go for. There’s a significant difference between a home loan and a mortgage loan, and your decision depends on your requirements and if a specific plan aligns with them. Although mortgage loans are most preferred among people, home loans prove to be the more reliable option in some instances.
Mortgage Loan Basics
A mortgage loan is specifically designed for real estate expenses, whether it’s home construction, remodeling, renovation, or any home improvements. If you opt for a mortgage loan, your property will be considered collateral if you cannot pay your loan back on time. So, the bank or financial organization where you obtained the mortgage loan will be regarded as the property owner against which the loan was secured. This status remains until you manage to pay them back.
Home Loan Basics
On the other hand, a home loan allows the financing of only the purchase or construction of a house. Home loan repayment is done over a period specified by the bank and is usually unsecured compared to mortgage loans. Adjustable or fixed interest rates are set for home loans depending on the lender. So, whether you’re looking for plots, flats, or condominiums for sale, home equity loans can support your purchase and help you get the home of your dreams. However, keep in mind that the property bought or constructed isn’t owned by the applicant until the completion of loan repayment. So, if you default on loan repayments, the lender has the right to liquidate your home and recover its assets.
Which One Is Better For You
Trying to determine which one of the two loans is better is irrelevant; however, finding the best one for you is essential to meet all your requirements. Home and mortgage loans differ significantly and have different purposes. So, before choosing, make sure you list your capabilities and needs, then do a comparative analysis of the two options. Based on the total loan amount you’re eligible for, both these options provide various services and incentives. However, they differ in the following ways.
1. Interest Rate
Home loans and mortgages can both have fixed or adjustable interest rates determined at the time of purchase. Although fixed interest rates will benefit you most financially, some prefer flexible rates with fluctuating stock values or any other standard. Home equity loans have comparatively lower interest rates than mortgage loans, with about one to three points higher interest rates.
2. Time Period
Both financing options provide a long repayment period since it’s a large amount. Home equity loans allow tenures of up to 30 years, while mortgage loans should be paid back within 15 to 20 years. Moreover, based on your financial conditions, you can pay partial or complete prepayments to reduce the monthly payment amount or the length of the tenure.
3. Quantum Of Loan
While home equity and mortgage loans provide huge loans since purchasing a house is a very big expense, home equity loans provide about 90% of the property’s value whereas, mortgage loans provide 60-70%.
Mortgage loans allow top-ups on your pre-existing loan. So if you’re eligible for a much higher loan value than you initially took, you can top-up your loan to meet what you are eligible for. For instance, if you’re eligible for a loan of 70% and you’ve only taken an amount of 40%, the rest of the amount can be topped up. On the other hand, home equity loans don’t provide the option of top-ups, although some lenders may be open to the possibility.
Although prepayment terms vary from lender to lender, no institution can charge a prepayment in case of a fluctuating interest rate. In contrast, a fixed interest rate entails paying a certain amount as a prepayment for the loan.
6. Tax Benefits
General mortgage loans usually don’t provide any tax exemptions; however, this may vary from state to state. Home equity loans offer a considerable reduction in loan repayments.
In conclusion, both home equity payments and mortgage loans come with a set of benefits. Depending on your requirements and eligibility, select the one that fits your criteria. Tenure length, amount of loan, prepayment, tax benefits, and the interest rate are all factors you must consider before deciding.