Buying a house can be a life-changing event for anybody. It is not uncommon for someone to take a loan to fulfil his or her dream to buy a house. However, it is a huge decision and needs to be dealt with a clear idea of the terminologies and factors included in the loans. Most people end up calling ‘home loans’ a ‘mortgage’ even though it is not a correct interpretation of the term.
What is the difference between home loan and mortgage loan? Complete guide
Here is a complete guide that tells you about the differences between the two.
What is Home Loan?
The secured loan in which the bank or the financial company keeps the required documents of the property as assurance is called the home loan (https://www.loanbaba.com/home-loan/). The bank or the financial company provides you with a sum that has to be returned to them at regular intervals and in regular instalments.
Additional interest is charged to the borrowed amount which must be repaid at the end of the tenure. The rate of interest for a home loan ranges from 8.35% to 14%. A home loan can be taken not just to buy a house, but to buy land for construction of the house, or to renovate your existing home as well. The loan tenure can be anything between 20 years to 30 years. There are subtypes of home loans which include:
- Land Purchase Loans: These loans are taken if a person wants to buy a piece of land and construct his or her own house and not buy an already existing house.
- Top up Home Loan: Suppose you need money during your tenure of repayment to make additional renovations or extensions in your existing plan. A top-up home loan provides you with an additional loan which is not related to your first loan.
- Home Extension Loans: This loan is for the purpose of extending your home space.
- Home Conversion Loans: In-home conversion loans, you can take an extra loan for another house you want to buy. Even if you have not fully repaid the previous loan, you can take another loan for another house.
- Home Construction Loans: For these type of loans, you borrow money to construct a house on a piece of land.
- Home Improvement Loans: In case you only want to renovate your own house, the home improvement loan is for that purpose.
What is a mortgage?
A mortgage is basically a debt instrument which is kept by the financing company so that the person who has borrowed money is obliged to pay back the borrowed amount within a predetermined time period. The bank or the finance company has claimed over the property until you repay the borrowed amount along with interest. The procedure to take a mortgage and a home loan are very similar.
Mortgages are also known as “liens against property” or “claims on the property.” In case of a residential mortgage, the bank gives money to a person to buy a house or property of any sort. The property is pledged to the bank, and in case the person is not able to return the amount within the predetermined time, the bank claims the house. They may evict the tenants from the house and sell it to clear the debt of the mortgage. The types of mortgage are:
- Fixed rate mortgage or traditional mortgage
In this, the rate of interest remains same throughout the tenure of repayment. There is no effect of the rising market rates on the rate of this mortgage.
- ARM (Adjustable Rate Mortgage)
An initial rate of interest is decided for a specific term which is usually lower than the market rate. After a certain time, the rate of interest is changed to the market rate of interest. This is totally unpredictable if the rate will increase or decrease and is a gamble on the borrower’s end.
What is the difference between the mortgage and home loans?
The major question is what exactly is the difference between the two? In case of a home loan, the legal documents pertaining to the ownership of the property are kept with the bank, and the property bought with the loan is sold off if the borrowed amount is not returned within a set period of time. However, in case of a mortgage, the borrower leaves the ownership of a property or the item of interest with the bank. In case the borrower is not able to repay the amount, the mortgage is liquidated to pay the debt.