Know the Differences Between Home Loan and Mortgage Loan
Home loan and mortgage loan both are secured loans which we usually require either to buy, or construct properties.
Now, what is a secured loan?
A secured loan is a type of loan where the lender accepts collateral against the borrowed amount so that if a borrower fails to repay the loan, then the lender can retrieve the loan amount with the help of the collateral. In case of a home loan, the purchased house becomes the collateral or the assets which the lending institution will use as security against the home loan amount.
Now, before understanding the differences between home loan and mortgage loan, it is important you know what a home loan is and how it functions.
What is Home Loan?
In its simple term, a home loan refers to the amount of money borrowed from any financial or non-financial organizations to either buy or construct a property. Home loans can also be availed for renovating an already existing house.
A home can be availed from either banking institutions or non-financial organizations by paying an interest amount on the principal amount borrowed. Home loans are usually availed for longer tenures like 15, 20 or 30 years. Within the loan tenure, a customer needs to repay both the principal amount and interest on home loan.
The rate of interest charged on Home Loans differs from bank to bank. There is a provision for choosing either floating or fixed rate of interest on the principal amount. In a fixed rate home loan, the interest amount on the principal amount remains the same throughout the entire tenure. But, in a floating or variable rate home loan, the rate of interest fluctuates based on the market condition over the duration.
Well, there are also NBFCs (Non-banking finance companies) which offer home loans for the needy consumers at affordable interest rates.
What is Mortgage Loan?
A mortgage loan is also a type of secured loan where an applicant borrows a particular amount of money by mortgaging a property. In this case, the property against which the loan amount is approved acts as a collateral. Mortgage loans are also known as loan against property because here banks or other non-banking financial companies provide mortgage by securing the property which could be either a residential property or commercial or other immovable properties like land, gold, heavy machinery, shop etc. In a loan against property, the lender remains as the actual owner, until the borrower pays off the loan completely.
How a Home Loan is Different from Mortgage Loan
Well, both home loan and mortgage loan are used mainly to cover large expenses. However, there are some marked differences between both loans. Read the following information to know more about mortgage loan vs home loan:
|Home Loan||Mortgage Loan|
|Home loan is primarily used for either purchasing a house or constructing a house. There is a restriction on how the amount should be used.||The loan amount received as a mortgage loan can be used to meet both personal as well as business requirements. There is no restriction as to how and where to use the amount. In fact, it can also be used for constructing a house.|
|There is tax exemption under section 80C of the Indian Income Tax Act, 1965.||No tax exemption is applicable.|
|Lower interest rate compared to mortgage loan.||Interest rates are higher than home loan interest rates|
|Low processing fee compared to mortgage loan.||Higher processing fee compared to home loan|
|Can be availed for longer tenures like up to 30 years||Maximum tenure is up to 20 years|
|Loan offered up to 90% of the property's market value||Loan offered up to 60% to 70% of the property's market value|
A mortgage loan or loan against property is mainly used for the following purposes:
House purchase or construction
Pursue higher education
Meet funding requirements
But, the amount received as a home loan can only be used for either purchasing a house or constructing one.
Difference Between Reverse Mortgage and Home Equity Loan
A reverse mortgage is a type of loan where the homeowner is usually a senior citizen who borrows against the value of his/her home and receives a lump sum amount either as fixed credit or line of credit. Here the homeowner does not have to make any loan payments. A reverse mortgage is ideal for senior citizens who have a self-acquired or self-occupied home in India. They can avail this loan to support themselves, if they don’t have adequate income to support themselves. The bank or the NBFC will make payment to the borrower against the mortgage of his / her residential house.
On the other hand, a home equity loan is a type of consumer debt. It is also referred to as a second mortgage that allows a homeowner to borrow against the equity in his/her residence. The approved loan amount is determined based on the difference between a home's current market value and mortgage balance due. Here the equity in the home serves as collateral for the banking institution.
Like a connectional mortgage loan, a home equity loan has a set repayment tenure. The borrower needs to make regular fixed repayments covering both principal and interest amount. In case, the borrower fails to repay the amount during the stipulated tenure, the bank has the authority to sell the property to satisfy the remaining debt.
Thus, the major difference between a reverse mortgage and home equity loan is that in the former, you don’t have to make repayment. But, in case of home equity loan, you need to repay the loan amount to the bank.
Mortgage Broker vs Bank for Home Loan:
A mortgage broker is someone who can help you find out the best deal for your home loan or loan against property and also help you with the whole process starting from choosing a loan to applying for the same and finally getting it approved with right documentation. Mortgage brokers usually have access to thousands of lenders and they can actually help you get exclusive deals. You can avail the following benefits by appointing a mortgage broker:
Get access to hundreds of loan products. You get to choose from a wide range of products.
Find the most exclusive deal as per your requirement
Get personalized service at your doorstep.
You can save your time. All formalities will be done by your broker.
No hidden cost involved as he/she will be explaining all details minutely.
Enjoy flexibility. Mortgage brokers are more flexible with their hours. They will meet you at your convenience - a time and place that is convenient for you. You don’t have to visit the bank physically.
But when you approach a bank for home loan or any other loans, you may face the following disadvantages:
Spend a lot of time by doing research to choose the right product suitable for you
You need to visit the branch physically and end up spending time.
The entire documentation process you need to do yourself that may require multiple physical visits to the concerned branch.
There are chances of your home loan application being rejected in case you don’t fit in their lending criteria.
You can figure out the hidden cost involved.
You may not get the competitive rate on your mortgage loan.
Who can Apply for a Home Loan and Mortgage Loan?
Both salaried and self-employed individuals can apply for home loan and mortgage loan