If you’re planning on purchasing your first home, you may have come across two terms that could be confusing to understand. When it comes to financing a house, most aspiring homeowners may wonder whether a home loan and a mortgage share the same meaning or are two separate things with distinct differences.
While mortgages and home equity loans are both borrowing methods that require a borrower to pledge property as collateral, they are not one and the same. To help you through the process of figuring out the different types of borrowing methods associated with your residential property, we’ve detailed the key differences between home equity loans and mortgages. Read on below to learn more about them.
What Is a Mortgage?
A mortgage is a loan used to purchase a house or other types of real estate. In this type of loan, you, the borrower, agree to pay the lender of the loan over time, usually in a series of payments. The property serves as collateral to secure the loan, ensuring that the borrower will keep up with the monthly payments.
For a borrower to be approved for a mortgage, they must apply through their preferred lender and meet the requirements set by the lending company. Once they’ve undergone the rigorous underwriting process and have reached the closing phase, they’ll be provided with the amount they applied for to pay off the house.
How Does a Mortgage Work?
A mortgage is used to purchase real estate without having to pay the total price upfront. The borrower of the loan repays the lender, including interest over a specific number of years until they pay off the entirety of the loan and own the property. If the borrower fails to commit to the monthly payments, the lender can seize the home.
What Is a Home Equity loan?
A home equity loan is also a mortgage. Still, unlike the traditional mortgage that you take out before purchasing any type of real estate, you take out a home equity loan after buying and accumulating equity in the home. Also known as a second mortgage, a home equity loan allows you to borrow money by leveraging your home equity.
Equity refers to the difference between the amount you owe on your mortgage and your home’s current worth. Suppose you have $150,000 on your mortgage loan on a property valuing $250,000. In that case, you’ll have $50,000 worth of equity that you can borrow.
The percentage of a home’s equity you can borrow will mainly depend on the lending company and your credit rating. As with a traditional mortgage, you must pay off a home equity loan over a fixed term.
Conclusion
Borrowing money is never a simple process. With the requirements, you must meet and the countless steps you need to take, you may even feel discouraged from securing the funds for your needs. But, by getting a credit union loan, you may be able to borrow money even with a low credit score!
If you’re thinking of applying for a loan, why not ask for funding from the best credit union in Buffalo? At Good Neighbors Credit Union, we can help put you on the path to financial freedom! We offer low rates, competitive terms, and monthly payments that you can feel confident about. Apply for a loan today!