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Mortgages and Home Equity Loans: What's the Difference
from:Knowing the difference between mortgages and home equity loans would save you a lot of trouble figuring out what you should take in the future. For there are some conflicting terms and interchangeable use on these two, you might end up mistakenly taking one for another.
Here are the differences between the two:
Mortgage is often coined as a method to buy property, often a residential properly by individuals without paying the full value upfront. It is also used to buy property for commercial lots or buildings by businesses. Mortgage is also used as a collateral (security of payment to the loan) in which the borrower or mortgagor presents to the lender or mortgagee. Another meaning would be a legal document where the borrower to pledge for properly where the property becomes the security for the payment of debt. Therefore mortgage is the property in which the mortgager buys thru the finances of the lender. This properly is under terms in which the borrower should pay at a particular rate. If not, the properly would end up on the hands of the lender.
Meanwhile, home equity loan is a type of loan vehicle wherein the homeowner uses his house as a collateral to get extra cash. This is unlike mortgage where the loan is used to buy a house. Home equity loan is only eligible to homeowners in need of immediate money.
There are two types of home equity loans: home equity line of credit and the fixed-rate loan.
These two are different. The home equity line of credit works like a credit card. The system goes this way: you apply for a loan; you receive a credit limit depending on the equity of your property; and you can spend your loan on any way you can whether it is a home improvement, tuition fee, or emergency bills to name a few. Sometimes the lender gives a card (somewhat a credit card) to the borrower as a means of purchase. The home equity line of credit is often called HELOC.
Fixed-rate loan on the other hand works like a traditional loan. The process goes this way: you apply for a loan, and when approved, you can get one-time lump sum of money. This loan is often paid either in 15 years or 30 years, depending on the choice of the borrower. You pay the monthly principal with a fixed interest rate.
Meanwhile, there is an instance wherein mortgage is associated with the home equity loans. This refers particularly on the fixed-rate loan. Often, fixed-rate loan are also called second mortgage. It doesn't mean though that you are buying another house. It doesn't mean also that you are refinancing your home. It only means that you are getting lump sum money for your loan. The fixed-rate loans can be used to finance a home improvement, emergency financial need, hospital bills, out of town vacations or education.
On the same note, if the fixed-rate loan is termed as a second mortgage, the home equity loan particularly refers to the home-equity line of credit or the HELOC. This draws the difference between the two.
Knowing these things will keep you on tract the moment you decide to apply a mortgage, home equity line of credit or a second mortgage. Learn these and you are safe all the way.
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