One of the most important steps in making the goal of homeownership a reality is obtaining financing. Although the terms “home loan” and “mortgage loan” are frequently used interchangeably, they refer to different financial products with different characteristics.
This essay examines the essential variations between mortgage and home loans, highlighting the most important ones that each potential homeowner should be aware of.
What is a Home Loan?
A house loan is a quantity of money that a person borrows from a bank or other financial organization, like a housing finance company, to help with a variety of housing-related activities. These can include building a new home, remodeling and expanding an existing one, or buying a new or old home.
The borrowed money has a fixed interest rate and is usually paid back over a predetermined time period in regular, manageable installments called EMIs (Equated Monthly Instalments). To meet the various demands of their clients, financial institutions in India provide a variety of home loan options, such as:
- Standard home loans
- Home construction loans
- House renovation loans
- Home extension loans
What is a Mortgage Loan?
A mortgage is a binding contract that a borrower and a lender enter into. A claim on the borrower’s property may be made by the lender under this agreement in the event that the borrower defaults on the loan, including interest.
Mortgages are the main tool for buying a house or using the value of an existing property to obtain further funding. In order to satisfy their financial or homeownership needs, borrowers might get favorable loan terms by pledging the property as collateral.
The Distinction Between Mortgage and Home Loans
A home loan is different from a mortgage loan in the following ways:
LTV, or loan-to-value ratio
The loan-to-value ratio is one way that home loans and mortgage loans differ from one another. Borrowers can obtain financing for up to 90% of the entire value of the property they plan to buy when it comes to home loans.
On the other hand, borrowers are limited to borrowing no more than 75% of the market value of the property when it comes to mortgage loans. As a result, home loans enable borrowers to obtain a larger credit amount for an equivalently valued property. Different lenders may have different LTV ratios.
Utilization
How the borrowed money can be used is the biggest difference between these two loans. When you get a home loan, the money is only used for things that are relevant to your house. A violation of the loan agreement and the application of fines may result from deviating from this planned usage, such as allocating the funds to other debts.
On the other hand, obtaining a home loan gives you greater freedom to use the money without being constrained by a usage condition.
Time of repayment
In terms of how long a loan must be repaid, mortgage loans normally have shorter payback periods, typically up to 15 years. Home loans, on the other hand, have lengthier payback terms—typically up to 30 years. The benefit of borrowing greater sums and dividing the debt into more manageable EMIs is this longer repayment period.
Rates of interest
Generally speaking, mortgage loans have higher interest rates than home loans. Because mortgage loans have no particular usage constraints, this interest rate disparity can be explained by their adaptability.
Is It Possible for Anyone to Get a Mortgage or Home Loan?
Not everyone is qualified to receive home loans and mortgage loans, which are financial instruments provided by banks and other financial institutions. People must fulfill certain requirements, such as having a steady source of income, a clean credit history, and the capacity to make a down payment, in order to be eligible for these loans.
To reduce the risks, lenders evaluate the borrower’s creditworthiness and financial stability. Self-employed people might have to submit extra paperwork to demonstrate their income. In the end, different lenders have different requirements for qualifying for home or mortgage loans, so it’s critical to research and contrast your options to choose which one best suits your needs.
In conclusion
Anyone starting the process of becoming a homeowner or purchasing a property must be aware of the distinctions between house loans and mortgage loans. A variety of needs and circumstances are met by the special features and terms offered by these two different financial solutions.
Home loans are perfect for spending related to the house because they are flexible, have a greater loan-to-value ratio, and have comparatively lower interest rates. On the other hand, mortgage loans are distinguished by more flexible use of funds, higher interest rates, and shorter repayment periods.
These loans are only available to those who meet certain requirements, such as having a steady income and a clean credit history. This highlights the importance of carefully weighing your options and comparing them to choose which financing option is best for you.
