Buying a home is one of the most significant investments you can make. For most homebuyers, that large of a purchase requires financing in the form of a mortgage. But once you have made your purchase, your mortgage payments start working for you as you build equity in your home. Home equity can be leveraged by taking out a home equity loan, also known as a second mortgage. Home equity loans and mortgages have different 澳洲幸运5官方开奖结果体彩网:repayment terms, althou🥃gh both use a home's property as collateral.

What Is a Mortgage?

A mortgage is an installment loan used to purchase a home. There are several dꦆifferent types of mortgages, including conventional loans backed by banks, and loans backed by the Federal Housing Administration (FHA),💞 the United States Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA).

Mortgage loans can have either fixed interest rates or adjustable rates. 澳洲幸运5官方开奖结果体彩网:Adjustable-rate mortgages (ARMs) adjust their rates on a set schedule. For example, a 5/1 ARM offers a fixed rate for the first five years. After that, the rate will adjust yearly until the loan is paid. There are many different types of ARMs, so make sure you understand the terms of your agreement.

What Is a Home Equity Loan?

A home equity loan is a loan secured by the equity built in your home, either by making mortgage payments or by increasing the value of your home. Home equity loans are often called second mortgages because they function similarly. Both are installment loans secured by property, and in the event of nonpayment, the lender will seize the property to repay the loan.

As opposed to a mortgage, a home equity loan is paid out in a lump sum of cash. The funds can then be used to pay for anything. Some common uses are for home improvements, paying down high-interest debt, or funding a vacation, wedding, or education.

How Are Home Equity Loans andꩲ Mortgages Similar?

Both home equity loans and mortgages are repaid on a fixed schedule. The most common repayment periods for mortgages are 15 and 30 years, but some lenders offer 10- and 20-year terms as well.

Home equity loans can range from five to 15 years of fixed payments. It’s fairly 🐽uncommon to find adjustable-rate home equity loans.

Both types of loans can also incur closing costs such as appraisals, document fees, notary fees, and origination fees. Some le🐠nders will waive some fees for home equity loans 𝐆to make them more attractive for borrowers.

How Are Home Equity Loans and Mortg𒁏🌊ages Different?

While home equity loans and mortgages are very similar, there are key differences. The first is in the 澳洲幸运5官方开奖结果体彩网:interest rate. Home equity loans tend to have a slightly higher interest rate than a primary mortgage. Since home equity loans are considered second mortgages, if you fail to make your payments, the home could go into 澳洲幸运5官方开奖结果体彩网:foreclosure to satisfy the debt. If the lender sells the home, it will use the proceeds to pay the primary mortgage first and then use any excess to pay the home equity loan. As a safeguard, they charge more interest to offset any potential loss.

Mortgages also have more repayment options than home equity loans. Although the most common payment term involves payments that include money toward your 澳洲幸运5官方开奖结果体彩网:principal and interest, there are also interest-only loans. Interest-only loans are structured asꦓ ARMs, and borrowers pay only interest for a set period of time before payments transition to the🌺 more traditional principal and interest format.

The Bottom Line

Mortgages and home equity loans have very similar repayment terms. Watch out for ARMs—your costs may fluctuate in volatile markets, and if you choose an interest-only loan, you may miss out on valuable equity-building time. Home equity loans offer flexibility for big purchases and can be figured into your monthly budget in the same way that your mortgage does. Choose the 澳洲幸运5官方开奖结果体彩网:best lender for you along with a term and payment that fits your budget to avoid 澳洲幸运5官方开奖结果体彩网:defaulting on your commitments and losing your home.