DSCR vs. No DSCR Loan: What's the Difference?
If you’ve tried acquiring financing for your investment purchase but can’t get a conventional loan or other solution, like a conventional loan, you...
Whether you’re a first-time homebuyer or a seasoned real estate investor, it’s important to understand the differences between two popular loan options: home equity loans and mortgage loans.
Vaster is here to tell you everything you need to know about these two loan options so that you can make the best possible decision for your financial situation and financial goals.
A home equity loan — also known as a second mortgage or equity loan — is a loan in which borrowers to use the equity of their home as collateral. The funds from a home equity loan can be used for purposes including (but not limited to) home renovation costs, medical expenses, education expenses, and more. Home equity loans can also help finance a second home or an investment property.
However, you can’t get a home equity loan until you have at least 20% equity in your home. Additionally, most lenders only permit you to borrow 80% to 85% of your home equity.
A home equity line of credit, at first glance, may look the same as a home equity loan, but those looks are deceiving: Essentially, a home equity credit line acts like a credit card where you have a borrowing limit and can access the funding that you need when you need it over a set period of time.
A home equity loan gives the holder a lump sum of cash upfront based on your home equity and your lender’s requirements. Subsequently, home equity loans tend to rack up more interest compared to home equity lines of credit since you’re taking out a large lump sum all at once rather than simply borrowing money as you need it.
Speaking of interest rates, it’s essential to note that home equity lines of credit tend to have variable interest rates and variable payments. In contrast, home equity loans tend to have fixed interest rates and fixed payments.
A mortgage loan is a loan you use when you’re initially buying a home. Lenders only provide a mortgage loan based on the appraised value of your home you’re looking to purchase. Furthermore, mortgage lenders only provide you with up to 97% of the home's purchase price, depending on your loan type.
As you now know, there are many different types of mortgage loans available depending on your financial situation and the type of property you’re purchasing.
Here’s a quick rundown on some of the different types of mortgage loans:
Now that you’ve reviewed the basics of home equity loans and mortgage loans, let’s dive even deeper and discuss the key differences between these two popular loan options:
Perhaps the biggest difference between a home equity loan and a mortgage loan comes down to the use of the loan. A mortgage loan is used to initially purchase a home or refinance a home. On the other hand, a home equity loan is used after you have purchased a home to cover the cost of home improvement renovations, starting a business, going back to school, etc.
Another difference between a home equity loan and a mortgage loan relates to eligibility. While both home equity loans and mortgage loans consider factors like credit score, income, and debt-to-income ratio (DTI) when determining eligibility, home equity loans also require that you have at least 20% equity in your existing home to qualify.
Home equity loans and mortgage loans also come with different interest rates. Although home equity loans typically come with lower rates compared to other types of personal loans, these interest rates are still usually higher than those that come with mortgage loans.
At the same time, keep in mind that interest rates vary for all loan types based on your credit score, location, loan term, and other factors.
The loan term is another difference between home equity loans and mortgage loans. Most mortgage loans, like conventional loans, come with longer terms of 30 years, although 15-year terms are also available.
Alternatively, home equity loans come with shorter terms that can range between five and 15 years. This loan type usually comes with higher interest rates.
It’s critical to consider differences in tax deductions between home equity loans and mortgage loans. If you took out your mortgage loan prior to December 15, 2017, you’re able to deduct the interest on your loan amount up to $1 million. If you took out your mortgage loan after December 15, 2017, you’re able to deduct the interest on your loan up to $750,000.
If you’re using a home equity loan to “buy, build, or substantially improve the home that secures the loan,” you’re able to deduct the interest on your loan up to $750,000. Previously, you were able to deduct the interest on your loan no matter how the money was used. The new rule applies to home equity loans from 2018 to 2025.
Some of the pros of a home equity loan include…
Some of the cons of a home equity loan include…
Some of the pros of a mortgage loan include…
Some of the cons of a mortgage loan include…
Everyone’s financial situation is different. Therefore, it’s important to choose the loan product that’s best for your financial situation and financial goals.
Here’s some guidance to help you choose between a home equity loan and a mortgage loan so you can make the best personal finance decisions:
You may want to use a home equity loan if…
Alternatively, potential homeowners may want to use a mortgage loan if…
Whether you’re purchasing your first home or your tenth home, Vaster can help make it happen with our wide range of lending solutions. Reach out to our lending experts to see what’s possible when you work with an experienced, flexible, and responsive lender.
Sources:
Mortgages vs. Home Equity Loans: What's the Difference? | Investopedia
HELOC vs. Home Equity Loan: Which Is Right for You? | Forbes
8 Types of Mortgage Loans for Buyers and Refinancers | NerdWallet
All About Non-QM Mortgages | The Balance
About Fannie Mae & Freddie Mac | Federal Housing Finance Agency
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