Mortgage Vs. Line of Credit

Real estate is often used as collateral.

A mortgage and a line of credit are financing options using real estate as collateral. These two options have similarities as each are used to finance real estate, but they also have differences, including lien position, interest rates, terms and use.

Position

A mortgage tends to be in the first lien position and is used to buy or refinance a property. A line of credit tends to be in second lien position and is typically used to access equity in a property. The lien position defines the order a lender is paid in case of default by the borrower.

Rates

The interest rates for mortgages tend to be lower than a line of credit. This is because lenders consider lines of credit riskier than a mortgage. One reason is because of the lien position. A mortgage in first lien position is paid before a line of credit in second lien position in the event of a default by the borrower.

Terms

Mortgage terms can go up to 30 years, while terms for lines of credit are up to 10 years.

Distribution

Mortgages are funded in lump sums and the borrower starts paying interest on the full amount immediately. Lines of credit allow borrowers to access funds as needed and you only pay interest on the outstanding balance.

Use

Mortgages tend to finance the purchase of a property, while equity funds are pulled from the property and used for purposes other than buying real estate. Lines of credit are often used to purchase vehicles, pay college tuition or fund family vacations.

References

• Federal Reserve Board
• Bank Rate