What is the Difference between Mortgage And Home Equity Loan

Welcome to our deep dive into the world of homeownership and finance! Today, we’re going to explore two key terms every homeowner should know: mortgage and home equity loan. Though they may sound alike, they serve different purposes. Let’s get started!

Credit: www.investopedia.com

What is a Mortgage?

A mortgage is a loan you get to buy a home. The house acts as “collateral”. This means, if you can’t pay the loan back, the lender can take back the house.

What is a Home Equity Loan?

A home equity loan is money you borrow against your home’s value. It’s for when you already own a home and need extra cash.

The Key Differences

Mortgage	Home Equity Loan
You get it to buy a home.	You use your home’s value to get cash.
It’s the first loan on a house.	It’s a second loan after your mortgage.
You pay it off over 15 to 30 years.	It usually has a shorter term to repay.

Mortgage Details

How a Mortgage Works: A bank lends you money.
You buy the house with that money.
You pay back the bank little by little.
Interest is what the bank charges you.

Home Equity Loan Details

How It Works: A bank gives you money.
The money is part of your house’s value.
You use this cash for big expenses.
You pay it back with interest over time.

Pros and Cons

Mortgage Pros And Cons

Pros: You can become a homeowner.
Interest rates might be low.
Payments spread over many years.
Cons: Can lose your home if you can’t pay.
Home prices can go down.
Long-term financial commitment.

Home Equity Loan Pros And Cons

Pros: Get cash for big things like college.
Interest rates can be lower than credit cards.
Cons: Puts your home at risk if you can’t pay.
The loan can cost more if home values drop.

Frequently Asked Questions Of What Is The Difference Between Mortgage And Home Equity Loan

What Defines A Mortgage Loan?

A mortgage loan is a secured loan where borrowers pledge their property as collateral to obtain financing to purchase a home.

Can You Convert Home Equity To Cash?

Yes, a home equity loan allows homeowners to borrow cash against the value of their home’s equity.

How Do Repayment Terms Vary?

Mortgage loans typically have longer repayment periods, whereas home equity loans may offer shorter terms.

Is There A Difference In Interest Rates?

Interest rates for home equity loans are often higher compared to primary mortgage loans due to increased risk for lenders.

Conclusion

Both mortgages and home equity loans are helpful. They work in different ways for different needs. A mortgage helps you buy a home. A home equity loan gives you cash when you need it. Always think hard and choose wisely! Remember to talk to a financial advisor for more help. They can explain things even better. They can also help you make the best choice for your family and your home.