A home loan and a mortgage are both methods of borrowing. They also both involve the borrower pledging their home as backing, or collateral, for the debt. This means that the lender can seize the home eventually if the borrower can’t keep up with their repayments.
While these two types of loans share this important similarity, there are also some major differences between them.
In this article, we’ll go over everything you need to know when it comes to mortgage vs home loan. This will help you decide which method of borrowing will best serve you and your family.
So make sure to keep on reading for more information.
Mortgages
When people talk about mortgages, they usually refer to traditional mortgages. This is when a financial institution, like a credit union or a bank, lends money to a borrower so that they can buy a home.
In most instances, the bank will lend as much as eighty percent of the purchase price or the home’s appraised value, whichever is less. For example, if you purchase a house that’s appraised at $200,000, you could be eligible to get a mortgage of as much as $160,000. You need to come up with the remaining twenty percent on your own.
Some mortgages, like FHA mortgages, will let you furnish a lot less than the standard twenty percent down payment, as long as you pay for the mortgage insurance. The interest rate on your mortgage can be fixed or variable.
A fixed mortgage means that your interest payment amounts are the same throughout the length of the mortgage term. A variable mortgage changes at certain intervals.
The borrower repays the amount of the loan as well as interest over a fixed term. The most common terms are fifteen years and thirty years.
If you end up getting behind on your payments, then the lender can seize your home in a process known as foreclosure. The lender will then sell your house, usually at an auction, and recoup its money that way.
When this takes place, the mortgage (known as the “first” mortgage) takes priority over later loans made against the home. Later loans can be a home loan (sometimes referred to as a “second” mortgage) or a home equity line of credit (HELOC).
The original lender needs to be paid off before subsequent lenders can receive any proceeds from the foreclosure sale.
Home Loans
A home loan is actually also a mortgage.
The main difference between a traditional mortgage and a home loan is that you take out a home loan after you have purchased or accumulated equity in the property. You take out a mortgage so that you have the ability to buy (finance) the home in the first place. Only then can you start to accumulate equity in your home.
A home loan is secured (guaranteed) by a homeowner’s equity in the home. This equity is the difference between the value of the property and the balance of the existing mortgage.
For example, if you owe $250,000 on a home that’s valued at $350,000, then you have $100,000 in equity. If we assume that you have good credit and you otherwise qualify, you can take out an additional loan using that equity as collateral.
Similar to a standard mortgage, a home loan is an installment loan that’s repaid over a fixed term. Different lenders will come with different standards as to what percentage of a property’s equity they’re willing to lend to you. And your credit rating will help to inform the lender’s decision.
Loan-to-Value (LTV) Ratio
A loan-to-value (LTV) ratio is going to be used by lenders to figure out how much money you can actually borrow.
Here’s how you can calculate an LTV ratio: Add the amount of money that you wish to borrow to the amount that you still owe on your home. Then, divide that amount by the appraised value of your home. This total is going to be your LTV ratio.
If you have the ability to pay down a good amount of your mortgage loan, or if your house’s value has risen greatly, then you could end up getting a fairly big loan.
Second Mortgages
In many instances, a home loan is considered to be a second mortgage. For example, if you have an existing mortgage on your home already.
If your house goes into foreclosure, then the lender holding your home loan doesn’t get paid until the first mortgage lender gets paid. Because of this, the home loan lender’s risk is higher. This is why these loans usually come with interest rates that are higher than traditional mortgages.
With that said, not all home loans are second mortgages. A borrower who owns his property completely and doesn’t have a mortgage on it may choose to take out a loan against the value of his house’s value. In this instance, the lender who makes the home loan is considered to be the first-lien holder.
These loans tend to come with lower closing costs and higher interest rates.
In order to decide which loan is best for you, you should consider reading A First Time Buyer’s Guide to Purchasing a Home.
The Importance of Knowing About a Mortgage vs. Home Loan
As we can see, when you know the difference between a mortgage vs. home loan, you can decide which loan is more appropriate for your financial situation.
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