Many situations in life can make it difficult to pay for expenses immediately. Loans are a useful tool.

A loan is required if you’re buying a house, renovating a house, or need emergency funds. There are many types of loans available for homes and properties.

It is best to speak to a mortgage broker about your particular situation. However, it is a good idea to do some research ahead of time to get an idea of the best options for you. This will ensure that you have all the necessary information to make informed decisions.

Traditional mortgages and equity loans are two of the most popular types of loans. Both types of loans have some commonalities, but there are some key differences. Let’s look at both.

What’s a Traditional Mortgage?

A traditional mortgage is one of the most popular types of loans that homeowners take out. A mortgage is required by many homebuyers to borrow money to purchase a property.

The borrower then pays a fixed amount each month and interest for a time period, usually 20-30 years. There are two kinds of interest rates: fixed and variable. Fixed interest rates will remain the same for the term of your mortgage, while variable rates can change over time.

If the borrower defaults on their payments, the lender has the right to claim the property and resell it to recover the loan amount. This loan is a long-term commitment and uses the property as collateral.

What’s a Home Equity Loan?

Home equity loans allow homeowners to access some of their equity. They will be able to borrow a portion of their home’s value. You can get a home equity loan, also known as a second mortgage, to access funds for family and renovations. The property can also be used as collateral for a home equity loan.

Your home equity loan value is determined by the property’s value and your current mortgage amount.

You could borrow between 80 and 85 percent of the equity amount depending on your credit score, financial situation, and lender.

What Are the Differences?

Let’s now look at the key differences between a traditional mortgage loan and a home equity loan.

Homebuyers and Homeowners

The main difference between these loan types is that traditional mortgages can be used for homeowners who want to purchase a home or refinance their mortgage. Home equity loans are available for existing homeowners who are looking for a portion of their home’s value. To fund the purchase of a new home, a homeowner cannot use a home equity mortgage instead of a traditional mortgage.

Interest Rates

Lenders are more at risk when home equity loans are referred to as “second mortgages”. In a foreclosure situation, where the collateral is seized, the lender is usually the one who is paid in full.

Home equity loans are riskier than mortgages, so the interest rates for these loans are usually higher than those for mortgages. However, rates for home equity loans are typically lower than other types of loans that you do not have to secure your home.

Use Of Funds

Traditional mortgages are designed to pay for the purchase or renovation of a property. You have more freedom to use the funds when you take out a home equity loan.

This loan option is popular among people who need to pay large expenses like medical bills, renovations, and other debt.

Contact a local mortgage broker for cis-mortgages and if you have any questions about loans, or if you would like to learn more about first and second mortgages.