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Home Equity versus Conventional Mortgage
from:Knowing what type of home loan, whether home equity or conventional mortgage, to take is one of the primary step in assuring that you are well aware of what you are entering at. It is only proper to take time and understand first what you should need and what you should take.
To begin with, there are great differences between home equity and conventional mortgage. But, this does not disregard that fact that there are some commonalities between the two. Here are the important things to note to better understand home equity and conventional mortgage.
Home equity.
Home equity loan is a type of loan vehicle that is used by homeowners to get immediate cash equivalent to the equity (the equity is determined by getting the difference between the mortgage or the amount you owe from the your lender, and the present market value of your home). The home will act as the collateral for the loan.
The principle is: your equity increase as your mortgage decreases; your equity decreases if you have high mortgage.
There are two types of home equity loans: the fixed-rate loan and the home equity line of credit.
Usually, the home equity line of credit is referred to the home equity loan itself. To avoid confusion, HELOC is often used to refer to the home equity line of credit.
In a home equity line of credit, the loan will come in the form of a revolving fund. This is somewhat similar to a credit card. Sometimes, the lender would even give the borrower a card as a means of purchase.
HELOC is most useful when you need a ready money anytime. And within a certain, pre-determined credit limit, you can access your money when you want it.
The fixed-rate on the other hand refers to the type of home equity where, unlike HELOC, you can get one-time lump sum payment as your loan. This becomes useful when the borrower needs to pay large amount of expenses. The good thing about the fixed-rate loan is that you will pay specific amount from your first up to the last month of payment. However, on the first period of payment, be ready to pay the interest more than the principal. The fixed-rate loan is often referred to as second mortgage.
Conventional mortgage.
Conventional mortgage is a type of loan vehicle where you purchase a home through a loan. Here, the borrower intends to buy real property and uses that property as a collateral. The conventional mortgage is commonly referred to as the first mortgage.
Conventional mortgage is often fixed-rate but there are instances where adjustable rate is applied.
Fixed-rate conventional mortgage is often termed either 15 or 30 years. Here the interest rate will not change regardless of the economic condition.
The Adjustable Rate Mortgages or ARMs have specific period where fixed rate applies. This is usually between 1 to 10 years. The rate will adjust by adding the margin to the index.
Aside from the fixed-rate and the adjustable rate, the conventional mortgage has the balloon term. This works by adopting a fixed term for a period of year usually at 5 or 7 years. After this, another fixed rate would apply.
Ultimately, the use of home equity and conventional loans still depend on the borrower. And if used properly, these loans will benefit the borrower with little or no problem in the years to come.
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