top of page

How is a home equity loan different from a traditional mortgage or personal loan?

Curious about Home Equity Loans

How is a home equity loan different from a traditional mortgage or personal loan?

A home equity loan, a traditional mortgage, and a personal loan are distinct financial products, each serving different purposes and with varying terms and features. Here's how they differ:

1. Home Equity Loan (Second Mortgage):
Purpose: Home equity loans are often used for specific, onetime expenses, like home improvements, debt consolidation, or major purchases.
Collateral: They are secured by your home. If you don't repay the loan, the lender can foreclose on your property.
Interest Rate: Home equity loans typically have fixed interest rates, meaning the rate remains constant over the loan term.
Tax Deductibility: In some cases, the interest on a home equity loan may be taxdeductible, subject to certain conditions.
Loan Amount: You can typically borrow a percentage of your home's equity, with the maximum amount determined by your equity, creditworthiness, and the lender's policies.
Repayment Terms: Home equity loans often have fixed repayment terms, such as 5, 10, or 15 years.

2. Traditional Mortgage (First Mortgage):
Purpose: Traditional mortgages are used to purchase homes. They help you buy a property when you don't have the full purchase price in cash.
Collateral: The home you're buying serves as collateral. If you default on the mortgage, the lender can foreclose and take ownership of the property.
Interest Rate: Mortgages can have fixed or adjustable interest rates. Fixedrate mortgages have a constant interest rate, while adjustablerate mortgages (ARMs) may have rates that change periodically.
Tax Deductibility: Mortgage interest deductions can be available, subject to tax laws and limits.
Loan Amount: The loan amount is generally based on the property's purchase price and your down payment.
Repayment Terms: Mortgages usually have longer repayment terms, commonly 15, 20, or 30 years.

3. Personal Loan:
Purpose: Personal loans are unsecured loans used for a wide range of purposes, including debt consolidation, medical expenses, vacations, or any general financial need.
Collateral: They are unsecured, meaning they don't require collateral like your home or car. Instead, lenders rely on your creditworthiness.
Interest Rate: Personal loans often have higher interest rates compared to home equity loans and mortgages because they are unsecured.
Tax Deductibility: Interest on personal loans is typically not taxdeductible.
Loan Amount: The loan amount is determined by your credit score, income, and other factors, and it's typically smaller than what you might get with a home equity loan or mortgage.
Repayment Terms: Personal loans have shorter repayment terms, usually ranging from 1 to 5 years.

In summary, the key differences lie in the loan's purpose, collateral, interest rate, tax implications, loan amount, and repayment terms. Home equity loans and mortgages are secured by your home and are used for specific homerelated purposes, while personal loans are unsecured and can be used for a broader range of needs. The choice among these loans depends on your financial goals and the specific circumstances of your borrowing needs.

Empower Creators, Get Early Access to Premium Content.

  • Instagram. Ankit Kumar (itsurankit)
  • X. Twitter. Ankit Kumar (itsurankit)
  • Linkedin

Create Impact By Sharing

bottom of page