A Home Equity Installment Loan or Mortgage - Which is Better?
Home equity loans and mortgages are similar ways to borrow money that involve giving your
property as security against the debt. In both cases, a lender can ultimately take possession of the
property if repayments are not made.
Although both loan types have this vital legal point in common, there are differences between
them.
It is important to understand what options are available when we are considering borrowing
against our home’s value.
KEY POINTS TO KEEP IN MIND.
- Both loans involve pledging a home as collateral.
- The biggest difference between a mortgage and a home equity loan is a mortgage is usually taken out to buy a property, whereas a home equity loan is taken out after you own the home and have built up equity in it.
- Lenders usually allow a mortgage of up to 80% of the value of the home, while the percentage that can be borrowed with a home equity loan can vary, and depends on the amount of equity that is available in the home.
- There is a total threshold of $750,000.00 as far as tax deductions are concerned on ALL residential debt, whether it is a mortgage, a home equity loan, or a combination of both.
IN DETAIL.
What is a Home Equity Loan?
A home equity loan is one way to get cash for home renovations or improvements, in a lumpsum payment that is repaid over a set period of time and at a fixed rate of interest. This type of
loan is only obtainable if enough equity exists in the property.
Equity is the market value of a home, less any outstanding balances of any mortgages or loans
secured on the property. As you make mortgage payments, the equity in the home grows, and if
property values in the area increase, then the equity also increases.
As with any home loan, the equity in the property is guaranteeing the debt to the lender and if
loan terms and/or repayments are not met then there might be a risk of foreclosure.
So, How Does A Home Equity Loan Work?
A home equity loan is basically the same as a second mortgage that is paid off with equal
monthly installments, made up of principal and interest, and over an agreed period of time. The
time period for repayment depends on the lender’s policies and terms that are agreed upon at the
time when the loan is taken out.
Different lenders have different criteria for home equity loans, and interest rates can vary from
lender to lender, depending on the applicant’s credit rating, but getting approved for a home
equity loan is much the same as with a first mortgage. Credit reports are studied and credit scores
are accessed. A higher credit score means the higher likelihood of approval and possibly a lower
interest rate.
Does A Home Equity Loan Make Sense?
The money you receive from a home equity loan can be used for anything you wish. Upgrade
kitchen appliances, remodel the bathroom, pay off high-interest rate credit cards, or take the
vacation of a lifetime., You can use the proceeds of the home equity loan for whatever your heart
desires but, if the loan is used for anything other than home improvement purposes, then
the interest paid on the loan is no longer tax-deductible.
What Is A Mortgage?
The term “mortgage” is generally taken to mean the traditional mortgage that is taken out to
purchase a property or home. A bank or other financial institution lends money to a borrower to
purchase a residential property. It is more than likely that a mortgage is the biggest and longestlasting loan that is ever taken out.
A mortgage has three main components that can be combined in varying ways, depending on the
lender and the borrower the type of loan, the interest rate, and the terms of the loan. Choosing
the correct mortgage depends on knowing how these three items work in conjunction with each
other.
Types Of Mortgage.
There are three prominent choices for a mortgage: conventional mortgage, government-backed
mortgage, and jumbo mortgage.
- A conventional mortgage. A is the most widely used. A bank or private lender will advance the money to purchase a home with better terms and interest rates than a government-backed mortgage. The drawback is they will require a larger down payment and high credit scores.
- A Government-Backed Mortgage, like an FHA or a VA loan is backed by an agency of the Federal Government. These offer more flexibility when it comes to credit scores and they sometimes have an option where a home can be bought with little or no down payment. A drawback to these loans is they tend to have restrictions and extra fees, like Private Mortgage Insurance. (PMI)
- A Jumbo Mortgage, is one where the limits of a conventional loan are exceeded. If the loan required is between $484,351.00 and $3 million, then a Jumbo Mortgage is the only option.
Different Type Of Mortgage Rate.
The mortgage rate refers to the amount of interest is paid to the lender over the period of the
loan, whether it is a fixed-rate or an adjustable-rate mortgage.
- A fixed-rate mortgage. Ahas an interest rate that stays the same throughout the whole term of the loan. This type of mortgage is ideal for those lenders who prefer the repayments to be the same each and every month. They are usually either 15-year or 30- year fixed-rate mortgages.
- An adjustable-rate mortgage (ARM) has an interest rate that can vary over time. This means the monthly payments will not be the same over the loan term, although the starting interest rate with this type of mortgage can be lower than with a fixed-rate mortgage. Typically an ARM is a 30-year loan with fixed rates for an initial period, then after that period, the rate reverts to an adjustable rate.
In Conclusion.
Depending on the situation, a home equity loan may be the way to go if extra cash is needed for
home improvements or that special purchase like kitchen or bathroom upgrades. If, on the other
hand, the funds are needed for purposes not related to a home purchase, then the answer could be
to take out a second mortgage, as they usually have lower interest rates than a home equity loan.
