It is common to hear people use mortgage and home equity loans almost synonymously, of course, because of the adjective that accompanies collateral.
However, it is necessary to know the difference so that, when making any financial commitment of any of these natures, we are aware of what we are getting into and are not taken by surprise.
There is a basic difference between these two terms and it is basically summarized in the following: the home equity loan is a method of obtaining financing by leaving a home or property as collateral; while the mortgage is a guarantee that the debt contracted to finance the purchase of a home will be repaid.
This may sound very confusing, but let’s go into parts so that the subject and the difference between a mortgage and a home equity loan are much clearer. Let’s start by addressing both definitions.
What is a mortgage?
As such, the mortgage is a real right that encumbers a real estate and that, generally, is used to obtain the necessary financing to acquire it; however, real estate can also be mortgaged.
This real right has to be registered in the Property Registry and is attached to the property. When the loan is paid off, if the home is to be sold, the seller must cancel the mortgage at the Property Registry.
The property is kept in the owner’s name as long as it complies with its obligations; Otherwise, the creditor can start selling the property to get back the money he loaned.
The three key factors within a mortgage are:
- Capital: the money loaned by the bank, which is usually less than the value of the property to be able to cover in case of default and have to auction the property.
- Interest: indicates the extra percentage that must be paid to the entity that granted the loan; it can be variable or fixed.
- Term: the stipulated time in which the capital must be returned.
What is a home equity loan?
The home equity loan is a product that is requested to obtain financing in the form of a consumer loan, that is, in projects that do not involve the purchase of a property.
The home equity loan has its basis and is always granted leaving real estate as collateral; It can be a home or premises, depending on the financial institution in question.
The only thing you need here is to have a property in your name and that is free of encumbrance.
In the home equity loan, the following points must be taken into account:
- The interest is not the same as that of the mortgage; It is usually similar to that of personal credits, that is, it is lower.
- They are not governed by the same conditions as in mortgages. The repayment term is usually shorter.
- You have the possibility of acquiring this type of credit even if you are on a list of defaulters or if your financial situation is not the best.
Differences between mortgage and home equity loan
With what was addressed in previous lines, you can give you an idea of the main difference between a mortgage and a home equity loan, but let’s be clear and direct.
Let’s tackle the three main differences between these types of financing so that you know which one suits you according to your current situation and your objective.
1. Destination of the resources obtained
The mortgage is one of the main tools to have access to the purchase of a home since it gives you the necessary resources to adjust the prices of the real estate of your interest.
The bank, basically, lends you to buy a home and takes it as collateral. The money is never deposited into your account but goes directly to the seller.
On the other hand, if you have a property in your name, a home equity loan can be the perfect ally to obtain financing for other purposes, such as: buying a car, starting or investing in a business, growing a project, unifying debts, carrying out improvements in your home, exiting an emergency, etc.
Each line of credit in question (mortgage and home equity loan) has a different treatment, therefore, the characteristics of the people who can have access to these financing vary.
2. Amount awarded
Another point in which the mortgage and the home equity loan differ has to do with the amounts granted.
Through a mortgage, you can get up to 80 or 90% of the value of the home you want to buy.
On the other hand, the home equity loan grants you up to 50 or 60% of the value of the property that you leave as backup and you can allocate it to whatever you prefer.
Finally, another of the differences between these two financings are the terms they grant to return the resources obtained.
The term to repay a mortgage is around 25-30 years, while home equity loans tend to have shorter terms since the amount requested is much less than that of a mortgage.
On average, the term to pay off a home equity loan ranges from 5 to 20 years.
If you are still thinking about what type of financing is for you, the only thing you should ask yourself is what you want it for.
In case you want to acquire property because you do not have, the mortgage is the option for you, but if you already have a property and want to invest in a business, pay payroll, acquire machinery for your company or some other option that is not to buy a home, home equity loan is what you are looking for.
Start the path to what you want to achieve today, hand in hand with ION Financiera. Our experts can advise you to see what type of financing suits you while maintaining your current lifestyle.