A financial crisis is never welcome but is a possibility that everyone should plan for. At this crucial time of financial emergency, you need proper resources, urgent funds, and a well-informed approach. It is also necessary that you have the ability and support to make a sound decision.
One of the strongest moves you can make during a financial emergency, and even for simple financial maneuvering, is to use your home’s equity – one of the most valuable assets a homeowner can have – to borrow money. Banks and financial institutions offer multiple loan options for the mortgage of residential property.
These are usually split into two types of loans: a mortgage and a home equity loan. It is necessary that you understand the differences between these two types of loans. In this article, we will compare both these loans and discuss their basics.
This is a type of secured loan offered by banks, financial institutions, and Housing Finance Companies. A mortgage loan is offered against property owned by the borrower. This property can either be residential or commercial.
Here is the list of features and advantages of a mortgage loan:
- You can use the loan amount for any purpose
- a mortgage loan is available for salaried employees as well as self-employed personnel
- Lower interest rates are generally offered
- The amount of loan that you will be getting is higher than home equity loans
- The borrower will be receiving numerous attractive tax benefits
- The mortgage loan processing time is fast and you also get an instant approval
- You can get a mortgage loan for both residential or commercial properties or land or plots you own.
Home equity loans can be considered a type of second mortgage loan that allows borrowers to borrow money against the equity of the property (be it residential or commercial) that they own. However, this loan is only offered on entirely constructed properties with clearance certificates and clear titles.
There are several benefits and features of home equity loans. Some of the primary ones are as follows:
- A Home equity loan is also available for people with lower credit scores
- You can get the loan for both residential and non-residential properties
- The loan amount is higher compared to a personal loan
- Affordable and competitive interest rates
- You can use the loan for any type of expense
- Additionally, there is flexibility in the loan period
|Category||Home Equity Loan||Mortgage Loan|
|Loan Tenure||The maximum time duration for this loan is usually about 15 years.||The maximum loan tenure for a mortgage loan can be of 15 years.|
|Loan Amount||The loan amount that you will be getting for a home equity loan is calculated by subtracting the owner’s mortgage balance due and the present market value of the property. Usually, in this case, the loan amount you will receive is about 70% of the total net value.||On the other hand, the loan amount you will be deceiving directly depends on the property’s present market value for a mortgage loan. The loan amount can be up to 80% of the current market value.|
|Rate of Interest||The rate of interest is lesser than a personal loan.||The rate of interest that you will get is lesser than the home equity loan.|
|Processing Time||The total time required for processing a home equity loan is between 2 to 4 weeks. This is because it might take a longer time for the lender to derive the net value of your property by finding its current value and the existing obligation against the property. It depends on the time required for document clearance and other verification processes.||On the other hand, for the mortgage loan, the entire process can usually be completed within a maximum of 10 days. This is because the lender only has to verify the current value of the property and the rightful ownership. However, it also depends on the clearance of all your documents and other processes.|
|Interest types||In most cases, when people opt for a home equity loan, the interest is generally fixed.||Usually, the type of interest is generally floating for a mortgage loan.|
|Prepayment Charges||The prepayment charges vary from one company to another.||There are no extra pre-payment charges.|
|Types of Loans||Fixed-rate loan: This type of home equity loan will allow the borrower to get a higher loan amount at an agreed interest rate. Then they can repay it over the loan tenure period. Home equity line of credit: With a HELOC, the borrower can withdraw funds at their convenience using a chequebook or credit card of the loan account. Interest is only charged on the amount actually used by the borrower.||Top-up Loan: This type of mortgage loan allows the existing borrower to get extra funds after a certain period of successful repayment.A regular mortgage loan or term loan: With this loan, the borrower can get a large amount of loan at a floating interest rate.Overdraft facilities: It will allow you to deposit extra money in your loan account and therefore enjoy reduced interest liability.|
Both these loans provide a considerable amount of money at low-interest rates for a short period. However, you need to remember that the amount you will get under a mortgage directly depends on the current market value of your property. However, under a home equity loan, one has to deduct current mortgages (if any) from the home’s value to arrive at the maximum available amount. This is also subject to the desired LTV offered by the lender.
But you need to remember that you are putting the most valuable asset on the line. And if by any chance you fail to pay back the amount on the mortgage or the home equity loan, the moneylender has every right to take ownership of your property. Thus, it makes sense to consult an expert before you make this big call.