Traditional Mortgage vs. Home Equity Loan: Which is Right for You?
Whether you’re ready to stop renting or already live in your forever home, understanding the difference between a traditional mortgage and a home equity loan is no less confusing. While both loan products are related to homeownership, they are not the same. Understanding how and why they differ could help clarify if either could be beneficial to you.
What is a Traditional Mortgage?
A traditional mortgage is what homebuyers most often use to finance the purchase of a new home. The most common types of traditional mortgages are:
- Conventional loans
These are offered by financial institutions. Available as either a fixed-rate or adjustable-rate mortgage, their low down payment requirements make them attractive to first-time borrowers and experienced homeowners planning a move to their next home.
Also offered by financial institutions, but unlike conventional loans, FHA loans are backed by the federal government. Low down payment options are available to qualified borrowers. Down payments are as low as 3.5%.
USDA loans are another government-backed mortgage loan available at banks and credit unions. They are designed for borrowers looking to purchase homes in rural areas.
These are federally-backed loans only available to U.S. military veterans and their families. You can apply for these loans at any participating financial institution. The VA loan program allows eligible borrowers to purchase their homes with 0% down.
What is a Home Equity Loan?
A home equity loan allows homeowners to borrow against the equity in their home and use the funds for various purposes. Equity is the difference between the amount you owe on the house and how much it’s worth. While “second mortgage” is also used to describe these loans, homeowners do not have to have an existing traditional or “first mortgage” to qualify. Instead, eligibility is based on the applicant’s income, credit score, equity in the property, and the lender’s underwriting requirements.
Funds are commonly used to pay off higher interest rate debt, college education expenses, and home improvement projects. The home’s equity can be accessed in one of two ways:
1) Loans
Borrowers who receive funds in a lump sum disbursement typically do so in exchange for a fixed interest rate and predictable repayment schedule. Finance charges and loan fees may be rolled into the loan. As a result, payments remain the same during repayment.
2) Lines of Credit
Alternatively, borrowers may access their equity through a line of credit. A home equity line of credit (HELOC) works like a credit card but typically comes with a lower interest rate and many times offers an interest-only repayment period. Despite a pre-set loan limit, you’re only responsible for repaying the amount advanced from the credit line plus any applicable finance charges and fees. HELOCs typically come with a variable interest rate.
Both types of home equity loans use the house as collateral for the loan.
Financial institutions often make interested homeowners choose between a home equity loan and a line of credit. But, ENB knows that a one-size-fits-all approach to equity lending doesn’t work for homeowners.
ENB customers have access to the best of both worlds with HomeLine, a type of home equity loan that offers the flexibility of a HELOC. Unlike a standard home equity loan, which disburses funds in one lump sum, HomeLine operates like a HELOC allowing customers to access cash at their convenience. Borrowers also have the option to lock in a portion or all of the available balance at a fixed interest rate.
Which One is Right for You?
Your intended use for the funds will help determine which loan is right for you.
- If you do not currently own a home but want to, a Traditional Mortgage is the best option.
- If you’re a homeowner who wishes to access your equity without selling or refinancing your home, a Home Equity Loan is the better match.
- If you are in the market for a second or vacation home, you may use either a Traditional Mortgage or Home Equity Loan to cover some or all of the costs.
Contact ENB at (877) 773-6605 to learn more about these and other home loan options.