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Tata Capital > Blog > Loan for Home > What Is The Difference Between Home Equity Loan Vs Mortgage Loan?

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What Is The Difference Between Home Equity Loan Vs Mortgage Loan?

What Is The Difference Between Home Equity Loan Vs Mortgage Loan?

Sometimes, person faces a financial crisis for which they need to borrow a high sum of money. In these cases, lenders are willing to provide a high loan if the person provides collateral, such as a property they own. There are two types of loans against property available here: home equity and house mortgage loan. The borrower can get a home equity loan against the equity they hold in a property. They can also get a house mortgage loan against fully constructed properties they fully own. Here is a guide on the two loan types.

Home equity loan vs mortgage loan – definitions

A house mortgage loan, also known as a home loan mortgage, is a loan that banks and lending institutions offer against commercial or residential properties that a borrower wholly owns.

So, what is home equity loan? Also called an equity loan or a second mortgage loan, a home equity loan is provided by lenders against the equity of a borrower’s home. The house must be constructed entirely and have clear title deeds. 

Going by the term, when you think of the question of what is home equity loan is, the answer indicates that it is a loan taken explicitly against a home’s equity. However, the loan can be taken against property that is residential or non-residential.

Home equity loan vs mortgage loan – differences

  • Loan amount:

A significant difference between mortgage and home loan is that for a home loan mortgage, the loan amount is derived from the current market value of the commercial or residential property. The borrower can get up to 80% of the property value or up to Rs 1 crore. The property will not have any existing loans and liabilities against it.

The loan amount that the borrower can get against their home in an equity loan is derived from the difference between the property’s current market value and the remaining mortgage balance owed by the borrower. The difference usually comes up to about 50–70% of the property value.

  • Type of interest:

Lenders often offer a floating interest rate when a home loan mortgage is concerned. Whereas with an equity loan, lenders usually offer fixed interest rates.

  • Processing times:

The processing time for a house mortgage loan is usually around ten days, subject to documentation clearance and verification processes. A home equity loan usually takes two to four weeks to process, subject to documentation clearance and verification processes.

  • Prepayment fees:

There are no prepayment fees if the house mortgage loan has a floating interest rate.

Prepayment charges will differ from one lender to another when it comes to a home equity loan, which usually has fixed interest rates.

What are the features and benefits of a home equity loan?

  • A home equity loan may be a good choice for borrowers with lower credit scores.
  • Since the loan amount is based on the property value, borrowers can get higher loan amounts from a home equity loan than from a personal loan.
  • The interest rates offered by lenders for home equity loans are lower than those for personal loans since equity loans have collateral.
  • The repayment tenure is usually up to 15 years, and there is flexibility given for the repayment.
  • The fixed interest rate also allows borrowers to procure higher loan amounts and repay the same over a predefined tenure.
  • Unlike a home loan, there is no need to use the funds for any restricted purpose. Borrowers can utilize the loan amount for any purpose they wish.
  • Borrowers can avail of either a fixed-rate interest equity loan or home equity line of credit (HELOC), where they can withdraw funds at their convenience via a chequebook or credit card.

What are the features and benefits of a home loan mortgage?

  • When it comes to mortgage vs loan, mortgage loans have lower rates of interest than home equity loans.
  • A good credit score and repayment history are a must to avail of this loan.
  • The borrower can use the loan amount as per their wish. They can use it to either pay for a child’s higher education or may utilize it for business purposes. The lender has no say in the matter.
  • Again, when looking at mortgage vs loan, mortgage loans have faster processing times than home equity loans.
  • Since the loan amount is against the property’s market value, which does not have any liens attached, the loan amount can be up to 80% of the property value.
  • Unlike home equity loans, there are tax benefits available under mortgage loans.
  • Borrowers can avail of a regular mortgage loan with a floating interest rate and a hybrid term loan facility (where the borrower deposits surplus funds in the account to enjoy reduced interest liability). They can also top-up loans (where the borrower can avail of additional funds post a specific timeframe of successful repayment).

Eligibility and Documentation: Home Equity Loan vs. Mortgage in India

In India, being eligible for a mortgage loan vs. a home loan will vary depending on several factors. These include the lending institution, the borrower’s income, profile, and credit score, the loan amount and tenure, and more.

In most cases, the eligibility criteria for home equity loans vs. mortgage loans can overlap. Some factors to keep in mind include:

  • Age
  • Credit score
  • Stability of income
  • Repayment capacity
  • Property ownership

In many cases, the documentation required for both mortgage and home loans overlaps. Most financial institutions ask applicants to submit the following documents:​

  • Identity proof as well as address proof (Such as Aadhaar cards, PAN cards, rental slips, gas or electricity bills)
  • Income documents (salary slips, ITRs, and bank statements)
  • Property-related documents such as your sale deed, title deed, and encumbrance certificate

It is important to contact your lender to confirm the eligibility requirements and documentation when submitting your application. 

Home Equity Loan or Mortgage Loan: Which is Right for You?

Given the features and benefits of both equity and house mortgage loans, both loan types benefit borrowers. Choosing one will usually come down to whether the property has any encumbrance or not. Encumbrance here means that if the property has any unpaid loans and bills. If the property does not have an encumbrance and as long as the property is in the borrower’s name, they can get a mortgage loan. 

However, there are times when a person has an existing home loan that they are still paying off. In this case, a home equity loan is available to them.

To Summarize

Both home equity loans and home loan mortgages have great features and benefits. Both are secured loans that offer quick disbursal of a considerable amount of funds to meet the need for emergency funds. If you are looking for funding, avail home loan online and get attractive options to fund the dreams you have looked forward to!

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FAQs

What is the key difference between a home equity loan and mortgage?

The primary difference between a mortgage and a home loan is that a home equity loan uses equity in the property to pay for some expenses. On the other hand, a mortgage loan is used to buy the property or house itself.

Can you use a home equity loan for any purpose in India?

 

Yes, in India, a home equity loan can be used for many different purposes. They are often referred to as “Loans Against Property.” They can be used to fund education, medical expenses, travel, and more. However, it is important to contact your lender to understand the terms and conditions.

Does a home equity loan qualify for tax benefits in India?

 

A loan against property can offer tax benefits. However, in most cases, this is only when the funds are used for certain purposes, like purchasing or renovating a home. If the loan is used for other expenses, such as personal or business needs, tax exemptions may not apply.

Who is eligible for a mortgage loan vs. a home equity loan?

 

The eligibility for a home equity loan vs. a mortgage loan can vary based on the lender. In most cases, lenders will look at the purpose for taking the loan, your credit score, repayment capacity, your income, and other factors. It is important to contact your lender for more information.

What are the risks involved with home equity loans and second mortgages?

 

There are several risks associated with home equity loans and second mortgages, including a negative impact on your credit score, increased levels of debt, the risk of foreclosure in case of missed payments, and closing fees and costs. Fund usage may also be restricted to only specific purposes.

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