Mortgagerateslocal.com – Are you thinking of buying or improving your home? If so, you may need to borrow some money to finance your project. But what are the best options for you? There are different types of loans that you can use to buy or improve your home, such as mortgage, home equity loan, and home equity line of credit (HELOC).
These loans have different features, benefits, and risks that you should be aware of before choosing one over the other. But what are the differences between these loans, and how can you choose the best one for your situation? How do these loans work, and what are the pros and cons of each one?
We will help you understand the differences between mortgages, home equity loans, and HELOC, and how they work, how to compare them, how to qualify for them, how to apply for them, how to use them wisely, what are their pros and cons, what are their tax implications, and what are their alternatives.
By the end of this blog post, you will have a clear understanding of the differences between mortgages, home equity loans, and HELOCs, and be able to make an informed decision about which one is right for you. Let’s get started!
What are mortgage and home equity?
A mortgage is a loan that you use to buy a home. The lender lends you a large amount of money upfront, and you repay the loan over a fixed period of time, usually 15, 20, or 30 years. The loan is secured by the home you buy, which means that the lender can foreclose on you and sell the home if you default on the loan. The main benefit of a mortgage is that it allows you to buy a home without having to pay the full price upfront. The main drawback of a mortgage is that it is a long-term commitment that requires you to make regular payments for many years.
A home equity loan is a loan that you use for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses. The lender lends you a lump sum of money based on the amount of equity you have in your home, and you repay the loan over a fixed period of time, usually 5, 10, or 15 years. The loan is secured by your home, which means that the lender can foreclose on you and sell the home if you default on the loan. The main benefit of a home equity loan is that it allows you to access the equity you have built up in your home and use it for any purpose. The main drawback of a home equity loan is that it reduces the equity you have in your home, which means that you will have less money to use for other purposes.
A HELOC is a line of credit that you use for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses. The lender gives you a credit limit based on the amount of equity you have in your home, and you can borrow as much or as little as you need, up to the limit, whenever you need it.
Home equity loan vs mortgage
Now that you know the basics of home equity loans vs mortgage, and HELOCs, you may wonder how to compare them and choose the best one for your situation. There is no definitive answer to this question, as different loans may suit different needs and preferences. However, here are some general factors that you should consider when comparing home equity loans vs mortgage, and HELOCs:
- Purpose: What do you need the loan for? If you need to buy a home, you will need a mortgage. If you need to finance a large expense that you can pay off in a fixed period of time, you may prefer a home equity loan. If you need to access funds on an ongoing basis for various purposes, you may prefer a HELOC.
- Amount: How much money do you need to borrow? If you need to borrow a large amount of money upfront, you may prefer a mortgage or a home equity loan. If you need to borrow smaller amounts of money as you need them, you may prefer a HELOC.
- Term: How long do you want to repay the loan? If you want to repay the loan over a long period of time, you may prefer a mortgage or a home equity loan. If you want to repay the loan over a shorter period of time, you may prefer a HELOC.
- Interest rate: How much interest do you want to pay on the loan? If you want to pay a fixed interest rate that does not change over the loan term, you may prefer a mortgage or a home equity loan. If you want to pay a variable interest rate that may change over the loan term, you may prefer a HELOC.
- Payment: How much do you want to pay each month for the loan? If you want to pay a fixed amount each month that covers both the principal and interest, you may prefer a mortgage or a home equity loan. If you want to pay a variable amount each month that only covers the interest, you may prefer a HELOC.
- Flexibility: How much flexibility do you want with the loan? If you want to have a set schedule and amount for the loan, you may prefer a mortgage or a home equity loan. If you want to have more control and choice over the loan, you may prefer a HELOC.
- Tax deduction: How much tax deduction do you want to get from the loan? If you want to deduct the interest you pay on the loan from your taxable income, you may prefer a mortgage, a home equity loan, or a HELOC, depending on how you use the loan and your tax situation.
These are some of the main factors that you should consider when comparing home equity loans vs mortgage, and HELOCs. However, you should also consult with a financial advisor, a lender, or a tax professional to get more personalized advice and guidance based on your specific circumstances and goals.
How to qualify for mortgages, home equity loans, and HELOCs
To qualify for mortgages vs home equity loans, and HELOCs, you need to meet certain criteria set by the lender, such as a bank or a credit union. These criteria may vary depending on the type of loan, the amount of loan, the value of your home, and the lender’s policies and standards. However, some of the common criteria that you need to meet are:
- Income: You need to have a steady and sufficient income that can cover the loan payments and your other expenses. The lender will check your income sources, such as your salary, wages, bonuses, commissions, tips, alimony, child support, dividends, interest, rental income, etc. The lender will also check your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying your debts, such as your mortgage, car loan, student loan, credit card, etc. Typically, the lender will want your debt-to-income ratio to be below 43%, which means that your monthly debt payments should not exceed 43% of your monthly income.
- Credit score: You need to have a good credit score that reflects your credit history and creditworthiness. The lender will check your credit report, which is a record of your past and present credit activities, such as your loans, credit cards, payments, balances, defaults, bankruptcies, etc. The lender will also check your credit score, which is a numerical representation of your credit risk, based on your credit report. Typically, the lender will want your credit score to be above 620, which is considered fair, or above 740, which is considered excellent, depending on the type and amount of loan. The higher your credit score, the lower your interest rate and the better your chances of getting approved for the loan.
- Equity: You need to have enough equity in your home that can serve as collateral for the loan. The lender will check the value of your home, which is the market price that your home can sell for, based on factors such as the location, size, condition, features, etc. The lender will also check the amount you owe on your mortgage, which is the principal balance of your loan. The difference between the value of your home and the amount you owe on your mortgage is your equity in your home. Typically, the lender will want your equity to be at least 15% to 20% of the value of your home, depending on the type and amount of loan. The more equity you have in your home, the more money you can borrow and the lower your interest rate.
These are some of the common criteria that you need to meet to qualify for home equity loan vs mortgage, and HELOCs. However, you should also check with the lender for the specific requirements and conditions that apply to the loan you are interested in.
How to apply for mortgage, home equity loans, and HELOCs
To apply for mortgage vs home equity loan, and HELOCs, you need to follow certain steps and procedures that may vary depending on the type of loan, the amount of loan, the value of your home, and the lender’s policies and standards. However, some of the general steps and procedures that you need to follow are:
- Shop around: You need to shop around and compare different lenders and loan options that suit your needs and preferences. You can use online tools, such as calculators, comparison websites, and reviews, to get an idea of the interest rates, fees, terms, and features of different loans. You can also contact the lenders directly, either online, by phone, or in person, to get more information and quotes for the loans you are interested in. You should compare the annual percentage rate (APR), which is the total cost of the loan, including the interest rate and the fees, of different loans. You should also compare the loan estimate, which is a document that shows the key details and costs of the loan, of different loans. You should shop around and compare at least three to five lenders and loan options before making a decision.
- Apply: You need to apply for the loan that you have chosen. You can apply online, by phone, or in person, depending on the lender and the loan. You will need to provide some personal and financial information, such as your name, address, phone number, email, social security number, income, assets, debts, credit score, etc. You will also need to provide some documents, such as your identification, proof of income, bank statements, tax returns, etc. The lender will use this information and documents to verify your identity, income, credit, and equity, and to evaluate your eligibility and risk for the loan. The lender may also ask you some questions, such as the purpose of the loan, the amount of loan, the value of your home, etc. The lender will then give you a preapproval letter, which is a document that shows the amount and terms of the loan that you are qualified for, subject to final approval and conditions.
- Appraise: You need to appraise your home, which is the process of determining the value of your home, based on factors such as the location, size, condition, features, etc. The lender will order an appraisal of your home, which will be done by a licensed and independent appraiser, who will visit your home, inspect it, take photos, measure it, and compare it with similar homes in your area that have recently sold. The appraiser will then write an appraisal report, which is a document that shows the estimated value of your home, the methods and data used to calculate it, and the factors that affect it. The lender will use the appraisal report to determine the amount of loan that you can borrow and the interest rate that you can get, based on the loan-to-value ratio (LTV), which is the percentage of the value of your home that you can borrow. Typically, the lender will lend you up to 80% of the value of your home for a mortgage, up to 85% of the equity you have in your home for a home equity loan, and up to 85% of the equity you have in your home for a HELOC, depending on the type and amount of loan. The appraisal may cost you around $300 to $500, depending on the size and location of your home, and you may have to pay for it upfront or at closing.
- Close: You need to close the loan, which is the final step of the loan process, where you sign the loan documents and receive the loan funds. The lender will schedule a closing date and time, usually within 30 to 45 days of your application, and send you a closing disclosure, which is a document that shows the final details and costs of the loan, at least three days before the closing. You will need to review the closing disclosure and compare it with the loan estimate to make sure that there are no errors or changes. You will also need to prepare some documents, such as your identification, proof of homeowners insurance, proof of title insurance, etc. You will also need to bring a cashier’s check or a wire transfer for the amount of money that you need to pay at closing, such as the down payment, the closing costs, the fees, the taxes, etc. You will then meet with the lender, the seller, the real estate agent, the title company, the attorney, and the notary, either in person or online, depending on the lender and the loan, and sign the loan documents, such as the promissory note, the deed of trust, the truth in lending statement, etc. The lender will then disburse the loan funds to you or to the seller, depending on the type of loan, and you will receive the keys to your home or the access to your line of credit, depending on the type of loan.
How to use mortgage, home equity loans, and HELOCs wisely
Mortgage vs home equity loan, and HELOCs can be useful and beneficial tools to help you buy a home, finance a large expense, or access funds on an ongoing basis. However, they can also be risky and costly if you use them unwisely or irresponsibly. Here are some tips and best practices on how to use mortgage vs home equity loan, and HELOCs wisely:
- Plan ahead: You should plan ahead and have a clear and realistic goal and budget for the loan. You should know why you need the loan, how much money you need to borrow, how long you want to repay the loan, and how much you can afford to pay each month. You should also consider the potential risks and benefits of the loan, such as the interest rate, the fees, the tax deduction, the equity reduction, the foreclosure possibility, etc. You should also compare different lenders and loan options and choose the one that best suits your needs and preferences.
- Shop around: You should shop around and compare different lenders and loan options before applying for the loan. You should use online tools, such as calculators, comparison websites, and reviews, to get an idea of the interest rates, fees, terms, and features of different loans. You should also contact the lenders directly, either online, by phone, or in person, to get more information and quotes for the loans you are interested in. You should compare the annual percentage rate (APR), which is the total cost of the loan, including the interest rate and the fees, of different loans. You should also compare the loan estimate, which is a document that shows the key details and costs of the loan, of different loans. You should shop around and compare at least three to five lenders and loan options before making a decision.
- Read and understand: You should read and understand the loan documents and disclosures before signing them. You should pay attention to the important terms and conditions of the loan, such as the interest rate, the payment schedule, the fees, the penalties, the grace period, the prepayment option, the cancellation option, the arbitration clause, etc. You should also ask questions and clarify any doubts or concerns that you may have with the lender, the real estate agent, the title company, the attorney, or the notary. You should not sign any document that you do not understand or agree with.
- Pay on time: You should pay your loan payments on time and in full every month. You should set up a reminder or an automatic payment system to avoid missing or late payments. You should also keep track of your loan balance and interest rate and adjust your budget accordingly. You should also review your loan statements and credit reports regularly and report any errors or discrepancies to the lender or the credit bureau. You should also contact the lender as soon as possible if you have any difficulty or hardship in making the payments and seek for assistance or alternative options, such as a forbearance, a deferment, a modification, a refinance, or a short sale.
- Use responsibly: You should use your loan funds responsibly and for the intended purpose. You should not use your loan funds for unnecessary or frivolous expenses, such as gambling, vacations, shopping, etc. You should also not use your loan funds to pay off other debts, such as credit cards, unless you have a lower interest rate and a better repayment plan. You should also not borrow more money than you need or can afford to repay. You should also not use your home as an ATM and tap into your equity without a good reason or a plan. You should also not use your home as a collateral for other loans, such as personal loans or car loans, unless you have a lower interest rate and a better repayment plan.
These are some of the tips and best practices on how to use mortgage vs home equity loan, and HELOCs wisely. However, you should also consult with a financial advisor, a lender, or a tax professional to get more personalized advice and guidance based on your specific circumstances and goals.
What are the pros and cons of mortgage, home equity loan, and HELOCs
Mortgage vs home equity loan, and HELOCs have their own pros and cons that you should weigh carefully before choosing one over the other. Here are some of the pros and cons of mortgage vs home equity loans, and HELOCs:
Mortgages
Pros:
- They allow you to buy a home without having to pay the full price upfront.
- They help you build equity in your home over time, which can increase your net worth and your financial security.
- They may offer a lower interest rate than other types of loans, such as personal loans or credit cards, because the loan is secured by your home.
- They may be tax deductible, depending on how you use the loan and your tax situation.
Cons:
- They are a long-term commitment that requires you to make regular payments for many years, which can be a burden on your budget and your lifestyle.
- They reduce the equity you have in your home, which means that you will have less money to use for other purposes, such as selling your home or refinancing your mortgage.
- They expose you to the risk of losing your home and damaging your credit score if you fail to make the payments or if the value of your home declines.
- They charge you interest on the loan, which can add up to a significant amount over the loan term, especially if you have a high interest rate or a long loan term.
- They may have other fees and costs associated with the loan, such as closing costs, origination fees, appraisal fees, title insurance, property taxes, homeowners insurance, and private mortgage insurance (PMI).
Home equity loans
Pros:
- They allow you to access the equity you have built up in your home and use it for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses.
- They may offer a lower interest rate than other types of loans, such as personal loans or credit cards, because the loan is secured by your home.
- They may be tax deductible, depending on how you use the loan and your tax situation.
- They have a fixed interest rate and a fixed payment schedule, which means that your monthly payment will stay the same throughout the loan term, which can help you plan your budget and avoid surprises.
Cons:
- They reduce the equity you have in your home, which means that you will have less money to use for other purposes, such as selling your home or refinancing your mortgage.
- They expose you to the risk of losing your home and damaging your credit score if you fail to make the payments or if the value of your home declines.
- They charge you interest on the loan, which can add up to a significant amount over the loan term, especially if you have a high interest rate or a long loan term.
- They may have other fees and costs associated with the loan, such as closing costs, origination fees, appraisal fees, title insurance, and property taxes.
HELOCs
Pros:
- They give you flexibility and convenience to access the equity you have built up in your home and use it for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses.
- They only charge you interest on the amount you borrow, not on the entire credit limit, and you can borrow and repay as often as you want, as long as you stay within the limit and the loan term, which can help you save money and manage your cash flow.
- They may offer a lower interest rate than other types of loans, such as personal loans or credit cards, because the loan is secured by your home.
- They may be tax deductible, depending on how you use the loan and your tax situation.
Cons:
- They reduce the equity you have in your home, which means that you will have less money to use for other purposes, such as selling your home or refinancing your mortgage.
- They expose you to the risk of losing your home and damaging your credit score if you fail to make the payments or if the value of your home declines.
- They charge you interest on the loan, which can vary depending on the market conditions and the lender’s margin, which can make your monthly payment unpredictable and unstable.
- They may have other fees and costs associated with the loan, such as closing costs, origination fees, appraisal fees, title insurance, and property taxes.
These are some of the pros and cons of mortgage vs home equity loan, and HELOCs. However, you should also consult with a financial advisor, a lender, or a tax professional to get more personalized advice and guidance based on your specific circumstances and goals.
What are the tax implications of mortgages, home equity loans, and HELOCs
Mortgage vs home equity loan, and HELOCs may have tax implications that you should be aware of before choosing one over the other. The tax implications may vary depending on how you use the loan and your tax situation. However, some of the general tax implications that you should know are:
- Mortgage interest deduction: You may be able to deduct the interest you pay on your mortgage from your taxable income, if you itemize your deductions on your tax return. The mortgage interest deduction applies to the interest you pay on the first $750,000 of your mortgage debt, or the first $375,000 if you are married filing separately, if you took out the loan after December 15, 2017. If you took out the loan before that date, the limit is $1 million, or $500,000 if you are married filing separately. The mortgage interest deduction only applies to the interest you pay on the loan that you use to buy, build, or improve your main home or a second home that you use for personal purposes, such as a vacation home. It does not apply to the interest you pay on the loan that you use for other purposes, such as paying off other debts, buying a car, or investing in a business.
- Home equity loan and HELOC interest deduction: You may be able to deduct the interest you pay on your home equity loan or HELOC from your taxable income, if you itemize your deductions on your tax return. The home equity loan and HELOC interest deduction applies to the interest you pay on the first $100,000 of your home equity debt, or the first $50,000 if you are married filing separately, regardless of when you took out the loan. However, the home equity loan and HELOC interest deduction only applies to the interest you pay on the loan that you use to buy, build, or improve your main home or a second home that you use for personal purposes, such as a vacation home. It does not apply to the interest you pay on the loan that you use for other purposes, such as paying for education, medical expenses, or personal expenses.
- Capital gains exclusion: You may be able to exclude the capital gains you make from selling your home from your taxable income, if you meet certain requirements. The capital gains exclusion applies to the profit you make from selling your home, which is the difference between the selling price and the adjusted basis of your home. The adjusted basis of your home is the original cost of your home, plus the cost of any improvements you made, minus the cost of any depreciation, casualty losses, or energy credits you claimed. The capital gains exclusion allows you to exclude up to $250,000 of your capital gains, or up to $500,000 if you are married filing jointly, from your taxable income, if you meet the following requirements:
- You owned the home for at least two years out of the five years before the sale.
- You used the home as your main residence for at least two years out of the five years before the sale.
- You did not exclude the capital gains from another home sale in the two years before the sale.
The capital gains exclusion does not apply to the capital gains you make from selling a second home that you use for personal purposes, such as a vacation home. It also does not apply to the capital gains you make from selling a home that you use for business or rental purposes, such as a home office or a rental property.
These are some of the general tax implications of home equity loans vs mortgage, and HELOCs. However, you should also consult with a tax professional to get more specific and accurate information and advice based on your particular situation and goals.
What are the alternatives to mortgages, home equity loans, and HELOCs
Home equity loan vs mortgage, and HELOCs are not the only options that you have to buy a home, finance a large expense, or access funds on an ongoing basis. There are other alternatives that you may consider, depending on your needs and preferences. Some of the common alternatives to home equity loan vs mortgage, and HELOCs are:
- Cash-out refinance: A cash-out refinance is a type of mortgage refinance that allows you to replace your existing mortgage with a new one that has a larger amount, and receive the difference in cash. You can use the cash for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses. A cash-out refinance may offer a lower interest rate than a home equity loan or a HELOC, because it is a first-lien loan, which means that it has priority over other loans in case of default or foreclosure. However, a cash-out refinance may have higher closing costs than a home equity loan or a HELOC, because it involves a new mortgage. It may also extend your loan term and increase your monthly payment, because you are borrowing more money. Additionally, it may reduce the equity you have in your home, which means that you will have less money to use for other purposes, such as selling your home or refinancing your mortgage.
- Personal loan: A personal loan is a type of unsecured loan that you can use for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses. Unlike a mortgage, a home equity loan, or a HELOC, a personal loan does not require you to use your home as collateral, which means that you do not risk losing your home if you fail to repay the loan. However, a personal loan may have a higher interest rate than a mortgage, a home equity loan, or a HELOC, because it is not secured by your home. It may also have a shorter loan term and a higher monthly payment, because you are borrowing a smaller amount of money. Additionally, it may not be tax deductible, depending on how you use the loan and your tax situation.
- Credit card: A credit card is a type of revolving credit that you can use for any purpose, such as paying for home improvements, consolidating debt, paying for education, or covering medical expenses. Unlike a mortgage, a home equity loan, or a HELOC, a credit card does not require you to use your home as collateral, which means that you do not risk losing your home if you fail to repay the loan. However, a credit card may have a higher interest rate than a mortgage, a home equity loan, or a HELOC, because it is not secured by your home. It may also have a lower credit limit and a higher minimum payment, because you are borrowing a smaller amount of money. Additionally, it may not be tax deductible, depending on how you use the loan and your tax situation.
These are some of the common alternatives to mortgages, home equity loans, and HELOCs. However, you should also consult with a financial advisor, a lender, or a tax professional to get more information and guidance on the best option for your situation and goals.
Conclusion
Mortgages, home equity loans, and HELOCs are all types of loans that use your home as collateral, meaning that the lender can take your home if you fail to repay the loan. We hope that has helped you understand these types of loans better and make an informed decision about which one is best for you.
