Banks and financial institutions usually offer plenty of options for borrowing money based on the value of a home. One of these options is a mortgage. It comes before ever having an interest in your home and helps you purchase the property. After borrowing a mortgage, that interest in the property becomes your equity, enabling you to borrow more through another type of loan called a home equity loan.
While a home equity loan is essentially akin to a mortgage, there are fundamental differences between these two loan types. To find out the distinction between a home equity loan and a mortgage and how each works, here is everything you need to know about these property-backed loans.
What is a mortgage, and how does it work?
A mortgage is a loan you can use to purchase or refinance a property. It is usually premised on an agreement between you and the lender that if you fail to repay the money you have borrowed plus interest, the lender has the right to seize the property from you.
Often, mortgage lenders have specific requirements you need to meet to obtain approval for the loan. These requirements commonly include:
- A minimum downpayment
- A minimum credit score that demonstrates your history as a responsible borrower
- A debt-to-income (DTI) ratio that proves you earn sufficient money to cover other expenses like credit card or car loan
- Enough cash to cover the closing costs on the mortgage
Mortgages come in various types: conventional mortgages, government-insured mortgages, adjustable-rate mortgages, and fixed-rate mortgages. However, the most common mortgage type is a 15-year or 30-year fixed-rate loan in which you have to repay the amount of the loan plus interest over the fixed term of 15 or 30 years. Like the term, the interest rate on a mortgage can also be fixed (the same throughout the mortgage term) or variable (changes from time to time).
What is a home equity loan, and how does it work?
A home equity loan is a loan you borrow against the interest or equity you have built-in your property. It is often considered a “second mortgage” because it is not used to purchase or refinance a home but is instead taken only to withdraw equity.
To put it simply, if you are already halfway through repaying your mortgage, a home equity loan in Singapore enables you to use the equity you have in your home to borrow more money. Equity is the difference between the value of the property and the existing mortgage balance.
For instance, if your home is worth $300,000, and you owe $120,000 on your first mortgage, you have $180,000 of equity in your home, which you can use as the collateral for another loan. Depending on several factors like your credit profile or the lender you borrow from, you can take a loan of up to 80% or 85% of your equity.
How do a mortgage and a home equity loan differ from each other?
A mortgage and a home equity loan are both property-backed loans that enable you to borrow money under the commitment of repaying it. If you fail to comply with such an obligation, the lender can seize your home since it is the collateral you have pledged for both loan types.
Generally, lenders allow borrowers to mortgage up to 80% of a property’s value. However, unlike a mortgage that will enable you to borrow money even before owning the property, you can only take a home equity loan after having already purchased and built equity on your home. Furthermore, the percentage you can borrow for a home equity loan varies according to how much of the property you own outright. In terms of interest, home equity loans also usually have higher rates than mortgages.
Mortgages and home equity loans are related to each other because they are both loans for which the debtor pledges the property as collateral. However, despite the similarity of their nature, a home equity loan is not the same as a mortgage because, unlike the latter, an equity loan can only be taken out when you already own or have equity in the property.
By understanding such a significant distinction between a mortgage and a home equity loan, you can make a better-informed decision about borrowing loans and become a better-prepared borrower.
For the most reliable home equity or property mortgage loan in Singapore, OxProp Capital is the financial institution you should borrow from! We are a leading provider of loans in Singapore dedicated to giving our clients innovative and reasonable financing solutions. Contact us today to learn more about how we can help you!