Did you know that the U.S. homeownership rate stayed at around 64%? It’s true.
The American dream is alive and well. It’s no secret that buying a home comes with responsibilities and expenses that owning a rental does not. If you’ve made the decision that it’s time for you to buy a house, you might be checking out home equity loans and mortgages.
Because you are establishing home equity with whichever option you choose, it’s best to know the differences between a home equity loan vs mortgage.
Are you ready to begin unlocking the equity in your home and taking advantage of lower home or mortgage payments? Let’s get started!
Table of Contents
Minimum Requirements and Rates
Mortgages require a higher credit score and generally have stricter loan requirements than home equity loans as they are larger amounts of capital being lent out. It will require an appraisal and inspection of the house, title searches, and insurance and additional costs may apply. Moreover, home equity loans have lower credit score requirements, however, the value of the house must support the loan, which often means having at least 20% equity in the house.
A home equity loan offers more favorable terms than mortgages and is a great way to leverage your equity as collateral for a loan. With both a home equity loan and a mortgage, lenders will require that the homeowner proves their ability to pay back the debt. Low rates are available for both types of financing depending on the creditworthiness of the borrower.
Maximum Loan Amounts
A mortgage, for instance, usually has a loan limit of up to $417,000, although limits can vary depending on the state and county you live in. Home equity loans generally have a higher maximum loan amount than mortgage rates, ranging from $50,000-$500,000.
Yet, these maximum loan amounts are only the theoretical maximum amount you can borrow — the lender may deny the loan if they deem you an excessive risk. Someone with more resources may be able to take on a larger loan than someone without them.
The main difference between the tax advantages of home equity loans versus mortgages is the ability of home equity loan borrowers to deduct the interest on their loan from their income taxes. While there are also tax advantages to mortgages as well, homeowners don’t have the same opportunity to deduct this type of interest.
Additionally, a homeowner with a home equity loan can deduct up to $100,000 in interest, while a homeowner with a home mortgage can only deduct up to $75,000.
Another difference is that home equity loans can be used for larger purchases, such as college tuition or home remodeling, while mortgages are typically just used for the purchase of a home.
Identifying the Differences Between Home Equity Loan vs Mortgage
Home equity loans and mortgages are both great ways to tap into your home’s equity, depending on the individual’s financial situation. A mortgage allows you to purchase a home, while a home equity loan offers you a lump sum of money that can be used for a wide variety of reasons.
Consider both loans and your options to determine which one is right for you. As always, it is recommended to contact a local loan specialist to discuss the details of a home equity loan vs mortgage.
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