What is a home equity loan, and how does it differ from a mortgage?

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by loma , in category: Real Estate , 7 months ago

What is a home equity loan, and how does it differ from a mortgage?

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1 answer

Member

by jeanie , 5 months ago

@loma 

A home equity loan is a type of loan that allows homeowners to borrow against the equity in their property. It is a fixed-term loan where the borrower receives a lump sum of money and makes regular monthly payments to repay the loan over time.


The key difference between a home equity loan and a mortgage is how the funds are accessed. With a mortgage, the borrower receives funds to purchase a property and secures the loan with the property itself. On the other hand, a home equity loan allows homeowners who already have a mortgage to access the equity they have built up in their property.


Here are a few more differences between the two:

  1. Purpose: Mortgages are used to finance the purchase of a property, while home equity loans are commonly used for various purposes such as home improvements, debt consolidation, education expenses, or other significant expenses.
  2. Loan Structure: A mortgage typically involves a long-term repayment plan, often 15 to 30 years, whereas a home equity loan is generally shorter-term, typically around 5 to 15 years.
  3. Interest Rates: Mortgage interest rates tend to be lower than home equity loan rates as mortgages are considered less risky for lenders. Home equity loan rates are often slightly higher due to the shorter repayment term and the fact that it is an additional loan on top of the primary mortgage.
  4. Collateral: Both mortgages and home equity loans use the property as collateral. However, in the case of a home equity loan, it uses the available equity in the property, which is the difference between the home's market value and the outstanding mortgage balance.
  5. Tax Implications: In many cases, mortgage interest payments are tax-deductible, providing potential tax benefits for homeowners. Home equity loan interest may also be deductible, but the Tax Cuts and Jobs Act of 2017 limited the deductibility of interest on home equity loans in certain situations.


It's important to note that both mortgages and home equity loans come with their own terms, conditions, and risks. Therefore, it is recommended to carefully consider one's financial situation and consult with a financial advisor or mortgage professional before making any borrowing decisions.