Mortgages and home equity loans share some similarities, but they are two different types of loans. Although they both require that the borrower’s house should serve as collateral, their interest rates and terms differ from each other.
When we talk about mortgages, we often refer to traditional mortgages. The money the lender loans to you is based on the value of your house. You can apply for a mortgage when you want to purchase a house. Besides, if you have already owned a house and need a large amount of money for another purpose, you also can get a mortgage by pledging your home as collateral. You can’t get the amount of money equaling to the full value of the home with a mortgage. Usually the maximum amount is 80% of the full value. Fixed-rate mortgage and adjustable-rate mortgage are two divisions of mortgages. Interest rates and terms vary due to different types. The most popular types of mortgages are those with a 15-year term and 30-year term, because the interest rate become most favorable with these two terms.
Home equity loans are also known as second mortgages. In a home equity loan, it is your equity in the house rather than its full value that you provide to the lender as collateral. Though they seem the same – both involving a house, they differ in nature. Home equity loans are divided into home-equity loans and home equity lines of credit. The lender loans money to you on the basis of your equity in the house instead of the value of your real property. Therefore, you can apply for a home equity loan only after you have owned the house. If you owe $100,000 on a house valued at $300,000, it means that the equity you possess in the home is $200,000. As long as you have got a good credit score, you can receive a home equity loan that is beyond your equity in your home.
If a borrower gets a mortgage and a home equity loan with the same house and finally fails to pay off both the two loans, the leaders will soon take measures to make compensation. In this case, the borrower confronts a foreclosure, and both the two lenders have the right to sell the house. However, the first priority goes to the lender of the mortgage loan. Only when the mortgage transaction is completed, can the lender of the home equity loan begin to deal with the house. Obviously, the latter have to bear greater risk than the former. The lender of the home equity loan may even won’t have the opportunity to access to the house. So interest rates of home equity loans are higher correspondently.