Equity Loan Vs. Mortgage
When you need money, lenders are much more willing to make a loan when you have a valuable asset to use as collateral to back the loan. One of the most popular assets loans is a house, which can be used as collateral for a mortgage or for a home equity loan. The two loans have different interest rates and functions.
Other People Are Reading
-
Function
-
Mortgages are taken out for the purpose of buying or building your home. A home equity loan is taken out for any purpose, but it uses your home as collateral to secure the loan. Common purposes for home equity loans include paying for home improvements, college costs and vacations.
Interest Rates
-
Both mortgages and home equity loans have lower interest rates than most other types of loans because they are secured by your home. However, mortgages will have slightly lower interest rates than home equity loans because mortgages are considered to be slightly more secure.
-
Considerations
-
You do not have to wait until your mortgage is completely paid off before seeking a home equity loan. Lenders usually limit your total debt to a percentage, often 75 to 80 percent, of the home value. Lenders will reduce the amount of money that you can borrow with a home equity loan by the amount that you owe on your mortgage. For example, a lender may allow you to take out a home equity loan for up to 80 percent of your home equity. If your home is worth $300,000, the limit would be $240,000. However, if you still owe $100,000 on your mortgage, you would be allowed to borrow only $140,000 with a home equity loan.
Tax Benefits
-
The interest on your mortgage and home equity loan might be deductible if you itemize your deductions. However, the Internal Revenue Service has very different limits on how much can be deducted. For mortgages, you are allowed to deduct the interest on the first $500,000 if you are single, or $1 million if you are married filing a joint return. For home equity loans, the limit is the interest on only the first $50,000 if you are single, or $100,000 if you are married filing a joint return.
Benefits and Warnings
-
By using a mortgage or home equity loan, you will secure a lower interest rate than if you took out an unsecured loan. This lower interest rate can save you money on interest payments over the life of the loan. However, because your home is the collateral, you can lose your home if you fail to make repayments.
-
References
- Photo Credit house image by Earl Robbins from Fotolia.com
