Mortgage vs Equity Loan: What are the differences and which one is better?


After meeting certain requirements, any bank will provide you with several options to apply for a loan based on the value of a home.

A mortgage occurs before you have a stake in the home and helps you buy it, but once the bank liability is acquired, it also becomes equity, and this allows you to borrow more money through a home equity loan.

Now, the most common type of mortgage is a 30-year mortgage, but there are also other options such as 15-year fixed-rate loans and adjustable-rate mortgages.

Mortgage eligibility requirements

  • Meet a minimum credit score that demonstrates a history of responsible payments.
  • Proof that you earn enough money to cover other expenses, such as a car loan or a credit card
  • Meet a minimum down payment
  • Have enough cash to cover mortgage closing costs

Home equity loan

If you are paying off a mortgage or have already paid off your mortgage in full, a home equity loan is available. This is a type of second mortgage that allows you to use the value of your home to borrow more money.

In this regard, depending on your credit profile, the lender you work with and other factors, up to 80 or 85% of your equity can be borrowed.

Mortgage vs. home equity loan

With both a mortgage and a home equity loan, you are borrowing money and promising to pay it back. If you default on that promise, the lender can keep your home, since it is the collateral for these two types of loans.

An important point to be aware of is that interest rates on home equity loans are usually higher than those on mortgages. This is because a home equity loan is usually the second mortgage, and the first mortgage lender is the first to get the money back if your home goes into foreclosure.

If you need access to cash, but don’t want to add a second mortgage to your bottom line, cash-out refinancing may be the solution.

Just remember that when you need to borrow money, your home can serve as collateral to access the money, but if you miss payments on a mortgage or home equity loan, the lender has the right to take possession of your home.

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