Home Equity Loan vs Mortgage: What You Should Know

Bruno Simpson Last Updated May 06, 2019 (0) comment

fha first time and repeat honebuyers

Over 5 million people buy homes every year in the United States. Understanding your options as a home buyer will help you make the best financial decision for you and your family.

Educating yourself on the possible risks and scenarios surrounding these situations is essential.

Here is everything you should know about the differences between a home equity loan vs mortgage.

Home Equity Loan vs Mortgage

As a soon-to-be or current homeowner, you might have heard about different kinds of loans and mortgages to make your home buying process possible. Purchasing a home can be a complicated and confusing time so all these options might not make much sense to you.

Acquiring a home equity loan is different from securing a mortgage and more importantly, you use them at different times.

However, not being able to pay either of the loans back can result in losing your home to the bank.

What is a Mortgage?

Most people will need financial assistance when going to purchase a home. A popular way to go about this is to get a mortgage for the property.

A mortgage will help pay around 80% of the purchasing price of the home. It could also be of the homes appraisal value if that’s less than the purchasing price.

Not all mortgages are not built the same and need different things from buyers. An FHA loan will require the purchaser to put down less money up front than a traditional mortgage. You will, however, need to pay for mortgage insurance with this option.

There are two different types of interest rates with a mortgage: a variable and a fixed. Fixed means that the interest rate will remain the same for the duration of the mortgage. A variable interest rate means that the amount of the interest rate will change over a specified period of time like from year to year.

You will need to pay back most loans within 15 to 30 years.

What is a Home Equity Loan?

Don’t let the name confuse you, a home equity loan is still a type of mortgage. The difference between this mortgage and a traditional mortgage is when you get it.

A home equity loan is for homeowners who already have equity and investment in their property. Think of the equity that you possess as the value of the property minus how much remains on your mortgage balance.

You can take that equity value and use it as collateral for an additional loan on the property.

Home equity loan lenders are all different. They lend out different percentages depending on the circumstances of the situation. Expect for your credit to be a significant determining factor in this decision.

How much money that you can borrow comes from using a formula called LTV or the loan-to-value ratio. You can calculate this ratio by dividing the money still owed on the house by the appraised value of your home.

Do Your Research

Deciding whether to get a home equity loan vs mortgage depends on what step in the home purchasing/owning process you’re in. You will need to do additional research to see if a home equity loan will be beneficial to you to make sure that’s the right step for you.

FHA Loan Search helps by educating homeowners on mortgage quotes, mortgage calculators, and FHA loan information.

Take a look at our blog for more FHA loan and real estate tips.

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