What is the difference between a mortgage and a home equity loan?

Question

I own a home that is paid off but would like to take out a loan to fund some home improvements as well as help my parents pay off their home equity loan. Given this scenario can I take out a mortgage since mortgage rates are lower or am I limited to a home equity loan. I'm not interested in HELOC's.

Answer 1

Mortgage repayments are generally over a much longer period of time than with a home equity loan, and the interest rates are lower with the mortgage.  Go for it.

Answer 2

No, you can take out a first mortgage.  HELOC's are generally second liens on a home, but the loan structure may allow them to be first liens as well.

The major difference is how much you are committed to and the time frame in which they can be paid.

If you KNOW you need to take out $30-50K or more, then get a mortgage on your home, as these are definately the best rates.  HELOC's cost more b/c you are not required to take an immediate draw, and it's actually a line of credit...much like a credit card.

You don't want to take out a HELOC if you have another alternative.

PS:  $30,000 is usually the minimum for a first mortgage...HELOCS are less...that may also make a difference to you.

Answer 3

The main difference is that with a mortgage you are borrowing all of the money at once and will be paying interest on the entire amount from day one.  Home equity loans allow you to draw the funds on an as needed basis and only pay on the money you are  using.  They are both liens on your real estate and can be in first or second position.  Most equity lines adjust the interest rate based on a % over prime and are therefore similar to adjustable rate mortgages in terms of interest.