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Understand the value of two popular loan types in the real estate market, home loans, and mortgage loans

Home loans and mortgage loans are some of the most common terms used in the domain of real estate and home financing. Individuals are often confused about these two financial products. Are home loans and mortgage loans the same? Are there any differences between the two? Which one is better? Let’s explore the differences between both.

What is a Home Loan?

A home loan comprises a borrower who borrows funds from the lender in order to purchase or renovate a house. The borrower has to give a percentage of the home’s value to the lender as a down payment initially. Monthly payments are then processed in accordance with a specific interest rate. The tenure of a home loan can span over 30 years. 

The property falling under this contract is kept as collateral to maintain the integrity of the home loan. If the borrower defaults on the loan and does not make all the repayments on time, then the lender has the legal right to liquidate the house to get the remaining dues. 

What is a Mortgage Loan?

With a loan-to-value ratio of up to 60-70% of the property’s market value, the borrower can get funds from the lender to cover home-related expenses or even meet other financial needs. A mortgage loan is free from the restriction of spending the funds solely on home expenses. 

The tenure of a mortgage loan can span over 15 years. The lender holds the right to sell your property if you fail to repay the funds on time.

Key Differences

The core purposes of both financial products are already defined. Let’s get into some key factors that explain the difference between the two. 

Rate of Interest

Home loans come with lesser interest rates compared to mortgage loans. You will always have 1-3% interest rate on mortgage loans.

Loan-to-Value Ratio

The borrower has the freedom to avail up to 90% of the current market value of the property as funds. The loan-to-value ratio for mortgage loans is up to 60-70% of the current market value of the property. Compared to home loans, lesser funds can be acquired in mortgage loans. 

Utility

As stated earlier, the funds acquired from home loans are only meant to be spent on the expenses related to your property. Borrowers cannot spend these funds on personal expenses at all. Conversely, a mortgage loan gives the borrower the freedom to finance any of his personal needs using the funds acquired from the lender. 

Which Option is Better for Financing?

A home loan is typically less expensive by all measures, whereas a mortgage loan allows you to spend the funds without any restrictions. Although home loans seem to offer a wider range of benefits compared to mortgage loans, this does not make a home loan more preferable to a mortgage loan. It is dependent upon your personal needs and financial goals, which of these two suits you the best.