Obtaining funding for a house is an essential part of making the aspiration of owning a home a reality. The terms home loans and mortgage loans are frequently used interchangeably, yet they refer to different financial instruments with specific characteristics. In this piece, we examine the basic disparities between home loans and mortgage loans, clarifying the important differences that all potential homeowners need to grasp.
What is a Home Loan?
A mortgage is a financial amount that a person secures from a lending organization, like a mortgage bank or a financial services firm, to support different activities related to housing. This can involve acquiring a new or pre-owned property, building a new house, or remodeling and expanding an existing domicile.
The funds obtained through loans carry a set interest rate and are usually returned over a specified duration via consistent, affordable payments referred to as EMIs (Equated Monthly Instalments). In India, various financial institutions provide different types of home loans to meet the varying requirements of borrowers, such as:
- Standard home loans
- Home construction loans
- House renovation loans
- Home extension loans
What is a Mortgage Loan?
A mortgage is a formal contract established between a borrower and a lending institution. This contract grants the lender the right to make a claim on the borrower’s asset if repayment of the borrowed money, along with interest, is not made. Mortgages are a key way to purchase a residence or leverage the equity in a current property to obtain further funding.
When borrowers pledge their property as security, they can obtain favorable loan terms that help them achieve their homeownership or financial goals. Potential borrowers have the option to choose from numerous mortgage varieties, such as:
- Simple mortgage
- Usufructuary mortgage
- English mortgage
- Sub mortgage
Difference Between Home Loan and Mortgage Loan
Here’s the distinction between a home loan and a mortgage loan:
Loan-to-value ratio (LTV)
A notable distinction between home financing and mortgage financing lies in the loan-to-value ratio. In the scenario of home financing, borrowers can obtain funding for as much as 90% of the overall value of the property they wish to buy. Conversely, with mortgage financing, borrowers are limited to a maximum borrowing amount of 75% of the current market value of the property.
As a result, mortgages enable borrowers to secure a larger loan sum for a property valued similarly. Different lenders may have varying LTV ratios.
Usage
The primary distinction between these two types of loans lies in the permitted use of the funds. With a mortgage, the money is designated solely for expenses related to purchasing a home. Using these funds for different purposes, like paying off other debts, could result in violating the loan terms and facing associated penalties.
On the other hand, obtaining a mortgage loan offers greater freedom, enabling you to use the money without being limited by any specific guidelines on how it must be spent.
Repayment time
When it comes to the duration for repaying loans, mortgages often have brief repayment schedules, generally capped at 15 years. Conversely, home loans feature more extended repayment durations, frequently lasting as long as 30 years. This longer repayment period allows borrowers to take out larger sums while distributing the loan into easier-to-handle EMIs.
Interest rates
Generally, mortgage loans have interest rates that are higher than those of home loans. This difference in rates is due to the flexibility of mortgage loans, which do not impose particular limitations on how the funds can be used.
Can Everyone Get a Home Loan or Mortgage Loan?
Banks and financial institutions provide home and mortgage loans as financial products, yet not everyone can obtain them. To be eligible for these loans, individuals need to fulfill certain requirements, such as having a reliable income, a solid credit score, and the capability to provide a down payment. Lenders evaluate the borrower’s financial stability and creditworthiness to reduce potential risks.
Those who are self-employed might have to supply extra paperwork to validate their earnings. In the end, different lenders have distinct criteria for home loans or mortgage loans, so it’s crucial to explore and evaluate various choices to discover the one that suits you best.