The terms ‘home loan’ and ‘home mortgage’ are used interchangeably in the banking world. To the layperson, it is the same thing, and most people regard both of them to be identical to any lending transaction they come across.
However, this is not the case. They may serve the same purpose of requiring a house put down as backing for a loan, but in truth, they have fundamental differences in terms of their nature, kind, and operation. Space Coast Credit Union is one of the company that provides different kinds of loans.
What is a Home Loan?
This is a loan taken from a bank to either purchase or build a house. These loans are not, however, necessarily restricted to purchases. They can also be used to modify your current home or even to purchase land.
Home loans are secured loans, i.e., they allow the lender to take the house or land as security or collateral for the loan. This means if the borrower is unable to repay the loan and declares bankruptcy, the lender has the right to sell the home to recoup the debt.
What is Home Mortgage?
When people say “home mortgage” they usually mean a traditional loan in which a financial institution like a bank or a home loan company like SoFi, lends money to an individual to help them purchase a home. The bank or credit union often lends up to 80% of the home’s value or the purchase price.
For instance, if a house is valued at $400,000, the person who seeks to purchase the house will be eligible for a $320,000 mortgage. The remaining 20%, or $80,000, would be required as a down payment by the borrower.
It is not, however, restricted to purchases. Mortgages could be taken on homes you already own and have fully paid for. In this case, the individual uses the house as collateral to secure a loan.
Key Differences Between a Home Loan and Home Mortgage
Home loans and home mortgages may have many similarities, but they also have many differences. Examining these differences will better assist you in knowing the kind and nature of the loan you should take.
Below are some of the dissimilarities:
Purpose of the Loan
The purpose or usage of the loan is a very important factor in differentiating between a home loan and a home mortgage. Home loans can only be used for certain restricted purposes like purchasing, building, or remodeling a home.
However, Home mortgages can be used for anything. If a person takes a mortgage on their house, they are not restricted in the usage of the loan. They could use it to buy a car or even secure a home loan for another property they wish to purchase.
Amount Available to the borrower
Financial institutions tend to lend more money to home loans than home mortgages. The loan-to-value ratio on a home loan is way higher than that of home mortgages. Some institutions lend up to 90% of the property’s value to the borrower.
For home mortgages, the loan-to-value ratio is rather low. This financing option allows for a loan of up to 70% to 80% of the property’s market value.
Interest on Loan
The interest charged on both loans is another dissimilarity. Home loans have lower interest rates than home mortgages. Mortgage loans often have interest rates that are 1 to 3% higher than home loans.
Time of Repayment
The time of repayment varies for different financial institutions, so give more extended time periods and sometimes the terms of repayment are open to negotiations.
In most cases, financial institutions tend to give a longer repayment period for home loans. Some institutions give 30 years for home loans and 15 years for mortgage loans.
Cost of Processing fees
The difference in the cost of processing fees is another factor that highlights the key differences between home loans and home mortgages. Most lenders charge higher processing fees on mortgage loans than on home loans.
