Mortgages Vs Home Equity Loans
Home equity loans and mortgages are both methods to borrow in which you pledge your home, or back, for the debt. If you don’t make on-time repayments, the lender has the right to seize your home. However, this is the only similarity between the two ways as the other make for the differences between the two, which we are going to discuss in this blog. If you are planning to go for a mortgage in Canada, you can get in touch with a Richmond Hill mortgage broker. But, check out both the options before making the final decision.
What is the basic difference between two?
How to classified between mortgage and home equity loan while you are going to borrow from any bank or lender to buy a new home. You need to know the whole thing before proceeding, that will help you to decide which option will be suitable for you as per your current economic position.
What is Mortgage?
A mortgage is a traditional money borrowing method through a financial institution, like a credit union or a bank, lends money to a borrower for purchasing a house. Mostly, the amount bank lends out for the purchase is 80% of the appraised value/purchase price of the house. Suppose, you are making a decision to purchase a house worth $200,000, the bank or your mortgage specialist may help you borrow an amount of $160,000 and the remaining $40,000 or 20% of the total value is your responsibility to pay.
Your mortgage interest rate can be either fixed or variable. That suggests you can pay the same interest rate throughout the mortgage term (fixed) or different rates every year (variable). You, as a borrower, need to pay the loan amount and the interest over a fixed term. Mostly the loan term period is 15 years or 30 years.
If you fail to make the payments on time, the lender has the right to take over your home following a process called foreclosure. The lender can sell the home at an auction (in most cases) to recoup the money it gave away as the mortgage loan. When this happens, the mortgage (or ‘first mortgage’ as it is called) gets the priority spot over the subsequent loans, such as a home equity loan (or ‘second mortgage’) or HELOC (Home Equity Line of Credit). Your original lender must be paid off completely before any proceeds from the foreclosure sale is received by the subsequent lenders.
What is a Home Equity Loan?
A home equity loan is secured by the equity of the house owner in the property. The equity of the homeowner is the difference between the existing balance of the mortgage loan and the value of the property. For example, you owe $250,000 on a home appraised at $350,000, the amount you have in equity is $100,000. Considering you have a good credit score or you qualify, you can take an additional loan keeping the $100,000 as collateral with the lender.
A home loan is nothing but a mortgage, with the only difference being, you can take a home equity loan when the house is bought and you own equity in the property.
Similar to a traditional mortgage, a home equity loan is repaid over a fixed tenure or term as an installment loan. Different lenders have different regulations of the percentage of the home equity they agree to lend and the borrower’s credit score is also an important point of concern. So, you should always maintain your credit score before going to a Richmond Hill mortgage broker.
Your LTV or Loan to Value ratio is checked by lenders to calculate the amount of money you are eligible to borrow. You can calculate the LTV ratio on your own:
Add the desired loan amount to the existing mortgage balance and divide it by the purchase price of the house. If you have paid a good amount of your mortgage already or the value of your property has risen, there are chances of getting a good amount as a home equity loan.
A Second mortgage is another name for home equity loans if the borrower has an existing mortgage on the residential property. If by any chance, the house is on the foreclosure, the lender of the home equity loan (or the subsequent lender) doesn’t get any money until the original lender or first lender is paid in full. That being said, the risk of home equity loan lender is higher than the original mortgage lender.
It is the reason why second mortgages or home equity loans have higher interest rates than conventional mortgages. Most of the Canadian use this second mortgage option to overcome the filthy situation. It is also worthy because the rate of interest is quite low. So, people can borrow it easily and it can be customized. The borrower can pay the amount with zero payment for up to 12 months.
However, not all equity loans are considered as second mortgages. A borrower who already owns the house (not on the mortgage) plans to take a home equity loan against property value. In a case as such, the lender giving out the home equity loan is the fine loan holder. You may have to pay higher interest rates but they have lower closing costs. So, make sure you talk to your mortgage specialist about all the details of home equity loan.
Now that you know the difference between a mortgage and home equity loan, you will know how to approach an RBC Mortgage Specialist Richmond Hill for the same. However, you must remember that there is tax deductibility on the additional loans of home equity loans you take out.
If you notice that the mortgage rates have dropped considerably after you took your mortgage, you can consider getting into a full mortgage refinance. It can save you on the additional money you take out as a loan or you can get lower interest rates on the balance you owe at that time.