When looking into making an investment in a home, you hear a lot of words thrown around that you may or may not understand. It can be a very complicated process, and typically you’re dealing with professionals that have been working in the field for a while, or with someone that is being trained by people with more experience. A home mortgage is typically necessary for purchasing your new home, and a home equity loan can be considered a good loan type depending on why you’re taking out the loan. But what do these words even mean? It can be very intimidating when you’re looking at your options and you don’t entirely understand what they mean.
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First Thing’s First, What is a Traditional Mortgage?
If you’re out looking for a new home, you’ve probably heard about this one a lot. This is the type that most people are referring to when they say mortgage. Mortgages are loans from a mortgage company, bank, or other financial institution given to help with the purchase of a home or property while using the property as collateral.
These usually have fixed rates and a fixed time frame for pay off. 30 years is the most popular time frame for pay off with these types of mortgages, not to say you can’t pay more than your minimum payment to pay it off earlier than that. The financial institution that you took your mortgage out with will retain the title to the property until the mortgage is paid off, then once it is paid off the title is transferred to the borrower.
What does Home Equity Loan Mean?
If you’re just in the market for a new home, unless you already have a home it’s unlikely that you’ll hear this one thrown around quite as much in the present tense as much. A home equity loan is another type of mortgage, but you have to have already bought the house and gained equity on it. Equity is defined as the difference between the home’s value and the existing mortgage balance. So, for instance, if your home is worth $400,000 and your mortgage balance is $200,000 in theory you’d be able to take out $200,000 in home equity loans.
Of course, just like with any type of loan there’s a lot of different factors that may or may not make this loan run as smoothly as the ideal situation. Typically, if you’re in good standing with the bank or financial institution you’ve taken the loan out with this should be an easy process.
How are Traditional Home Mortgages and Home Equity Loans Similar?
There are some similarities between a traditional home mortgage and a home equity loan. The biggest of which is that both require you to put your house up as collateral, so the financial institution that you’re working with has the ability to take your home if you don’t make your payments. On the other hand, most financial institutions will only allow you to take 80% of a home’s value out as a mortgage while home equity loans depend entirely on how much of the home you own.
Simple Answers for Complicated Questions.
If the question you were asking is “are home equity loans traditional mortgages?” the answer, in short, would be no. Although, home equity loans are a different type of mortgage they do require you to own at least a percentage of your home before you’re able to take out this kind of loan. There is any number of reasons why people take out home equity loans from starting a business to helping get out of other debt or even buying a new property. If you think you may qualify and benefit from taking out this type of loan, it may be wise to speak with your financial institution to find out what options are best for you.