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A home mortgage and a home equity loan or line of credit are both types of secured loans that use your home as collateral. However, there are some key differences between the two.
Home Mortgage
A home mortgage is a loan that you take out to purchase or refinance a home. The loan is secured by the property, which means that the lender can take possession of your home if you default on the loan.
There are two types of home mortgages. Most common is a Fixed Rate Mortgage, which means that the interest rate will not change for the life of the loan. This can make it easier to budget for your monthly payments.
There is also the option of Adjustable-Rate Mortgage (ARM). This is a type of home loan where the interest rate can change over time. Unlike a fixed-rate mortgage, where the interest rate stays the same for the entire loan term, an ARM has a variable interest rate that is usually tied to a specific financial index. This means that as the index fluctuates, the interest rate on the mortgage may go up or down. Typically, ARMs start with a lower initial interest rate compared to fixed-rate mortgages, but there is a risk that the rate could increase in the future, affecting monthly payments. Borrowers should carefully consider the potential changes in interest rates before choosing an adjustable-rate mortgage.
Home Construction Loan
A construction-to-permanent home loan is a type of mortgage that combines the financing for the construction of a new home and its permanent mortgage into a single loan. This type of loan is typically used by individuals who plan to build their own home rather than purchasing an existing one.
Here’s a brief overview of how a construction-to-permanent home loan generally works:
- Construction Phase: Construction financing and builder disbursements (draws) for work completed. Interest only payments on outstanding balance.
- Transition to Permanent Mortgage: Loan automatically converts into a permanent mortgage once work is complete, and Certificate of Occupancy is issued.
- Permanent Phase: The new mortgage can either be a fixed or adjustable rate mortgage with principal and interest payments.
It’s important to note that specific terms and conditions can vary among lenders, so individuals considering a construction-to-permanent home loan should carefully review the terms offered by their chosen lender.
Home Equity Loan or Line of Credit (HELOC)
A home equity loan or HELOC is a loan that you take out after you have already purchased a home and have built up equity in the property. Equity is the difference between the appraised value of your home and the amount you still owe on your mortgage. A home equity loan is a lump-sum loan, which means that you will receive a fixed amount of money at closing. A HELOC is a revolving line of credit, which means that you can draw on the funds as needed up to a certain limit. HELOCs typically have variable interest rates, which means that the interest rate can fluctuate over time.
Here is a table that summarizes the key differences between mortgages and home equity loans or HELOCs:
| Feature | Mortgage | Home Equity Loan or Line of Credit |
|---|---|---|
| Purpose | Purchase a home | Finance home improvements, debt consolidation, or other expenses |
| Timing | Before you purchase a home | After you purchase the home and have built up equity |
| Interest Rate | Typically fixed but can be variable | HE Loan is fixed, LOC is variable |
| Loan Amount | Typically larger | Typically smaller |
| Closing Costs | Typically more expensive | Typically less expensive |
| Repayment | Dependent on loan type | Fixed monthly payments for loan, variable payments for line of credit |
Here are some additional things to keep in mind:
- Mortgages are typically only available to borrowers with good credit scores and a steady income.
- Home equity loans and HELOCs are available to borrowers with a wider range of credit scores and incomes.
- The interest rates on home equity loans and HELOCs are typically higher than the interest rates on mortgages.
- Closing costs are typically lower for home equity loans and HELOCs than for mortgages.
Which one is right for you?
The best type of loan for you will depend on your individual needs and circumstances. If you are looking to purchase a home or refinance an existing home loan, then you will need a mortgage. If you are looking to finance home improvements, debt consolidation, or other expenses, then you may want to consider a home equity loan or HELOC.
It is important to talk to one of our team members or your financial advisor to discuss your options and get the best loan for your needs.