The Difference Between a Home Equity and Mortgage Loan

If you are a homeowner in need of cash you may have several options. Two of these options will be a Home Equity loan and a Home Mortgage. While both of these have advantages, chances are one will be better suited for your personal situation. In order to take advantage of the loan that will be best suited for your needs it is essential that you know the primary difference.

Cash Out Mortgage Loan


This loan involves refinancing your home. Depending on interest rates at the time, this could be a great option. By refinancing you may not only get the cash you need, but also end up with better terms than your current mortgage. This could save you thousands of dollars on the life of your home mortgage due to reduced interest rates.

In a mortgage loan you receive the cash you want in a lump sum. It is a good idea to refinance less than 80% of your home's value to make sure you do not need to pay the private mortgage insurance.

Another positive effect of a home mortgage loan or refinancing is that you could possibly reduce the length of your loan. By reducing your terms you may increase your monthly payment but you will decrease the amount of interest you pay on the life of your loan.

Home Equity Loan

In the case of a home equity loan you are basically applying for a second mortgage that you can draw against as you need funds. This does not require refinancing, but it will give you a new monthly payment amount. It is important to realize that with a home equity loan there may be closing costs and other fees right when you set up the loan.

Typically the interest rate with a home equity loan will be higher than on your first mortgage. The amount available to finance will depend on your credit. For this reason it is important to make sure that your credit is in good shape before applying for a home equity loan. It is also important to correct any mistakes that may be on your credit report.

Shop Around

Before you file for a home equity loan or cash out mortgage, you will want to shop around to find the best deal. It will take some time to do it right - but you will benefit from taking the time to find the loan right for your specific needs. There are several factors you should keep in mind when looking for a loan.

  1. What is the interest rate? You want to shop for the lowest possible interest rate.
  2. What fees will you be charged? These charges may not be listed up front, you may need to ask specific questions to discover what all the fees are.
  3. What are the terms of repayment? The length of the loan and the interest rate will determine how much you will pay the bank over the life of the loan.
  4. What are the monthly payments? You will want to make sure the monthly payments are well within your budget.
The decision to take either a home equity loan or a mortgage loan is entirely yours. What you decide on should be based on whether you want to refinance your existing mortgage or if you desire a second mortgage. Both have their benefits, only you can decide what will work best for you.