Mortgages vs Home Equity Loans vs HELOC

Want to buy a house but don’t have enough cash to pay for it? You might consider a mortgage, but have you ever heard the term HELOC – Spoken “He-Lock”? They are not the same as a home equity loans; although, the terminology often gets intertwined and confused by many. All three of these options share some commonality, though: They are agreements between you and a lender to buy a home, re nance, or borrow more against the home you already own. You are borrowing money, paying interest, and if you fail to repay the money, the lender could take the property from you through a process called foreclosure. But they also have some key differences that consumers should consider.

MORTGAGES

Mortgages can be used to buy almost any real property such as homes, land, and commercial real estate. To obtain a mortgage, you will need to prove that you have current income and can make monthly payments, which should be no more than 28 35% of your income. Most mortgages have either 15- or 30-year terms, and the interest rate can be  xed or variable, depending on your downpayment and credit history. Watch out, though: The mortgage industry is built and survives on the fees they generate called “closing costs.” These fees can range between 3-7% of the purchase price of your home. All these fees are negotiable, however, including who pays them. These closing costs include a(n):

• Origination fee

• Application fee

• Title fees

• Attorney fee

• Agent commissions

• Taxes

• Discount fee

• There can be more – watch out! 

Tidbits you might not know:

VA mortgages require no down payment and no mortgage insurance—if you have a VA rating of 10% you are exempt from the VA funding fee.

FHA mortgages are a good option for first time home buyers and require a lower downpayment of 5-10%, depending on credit score versus the typical 20% down. FHA loans will require a special type of mortgage insurance premium called MIP.

Any downpayment less than 20% where the loan-value ratio is less than 78% will also require another type of mortgage insurance called PMI.

A mortgage payment schedule is called “amortization” and most of the interest is paid at the beginning of the loan.

Mortgage interest is tax deductible. If your interest rate is high enough, then there is a possibility you can reduce the amount of income tax you owe.

HOME EQUITY LOANS

A home equity loan, sometimes called a second mortgage, is an additional loan on your home where you are borrowing against unused value. For example, if your home is worth $500,000 but you only owe $150,000 on it, you could borrow against the $350,000 in equity. The money can be used for anything like kitchen remodels, home repairs, a new car, a fancy vacation, etc.

• Home equity loans can borrow against 80% of your home’s excess equity.

• There are closing fees involved in home equity loans, too.

• Payments are fixed.

• The lending process is just as rigorous, frustrating, and can be deceptive just like a mortgage.

• Home equity loan interest is not tax deductible.

HELOC or Home Equity Line of Credit

These loans are a type of revolving credit based on a home’s equity.

• Consumers can borrow against a line of credit whenever they need.

• The payments are based on how much consumers borrowed.

• Interest rates can change.

• HELOCs are not good forever, and the term can range between  ve and 30 years. They also typically allow withdrawals up to 10 years and 20 years to repay.

• The lending process is just as rigorous, frustrating, and can be deceptive just like a mortgage.

• HELOC interest is not tax deductible.

MY ADVICE: Treat any of these loans with great care and skepticism because these loans are not very straight forward. Expect that the lender will change or revise terms throughout the lending process and pay utmost attention to the bottom-line after all closing costs. For example, you may negotiate a lower interest rate on a re nance, but the lender charges a higher origination fee. This essentially collects money up front rather than over time. Billions of dollars each year are spent on fees and that is how lenders are making money. Money is generated by lenders in closing costs rather than interest paid over the long run, so it doesn’t matter what the interest rate is to an originating lender. I highly encourage everyone to educate yourself further on the lending process, which can save you thousands.