Both mortgages and home equity loans use your house as security: If you don’t make your payments, your creditor can take your house. You will also realize that the application procedure for the two loans is comparable. Where most people have to utilize a mortgage to purchase a house, however, taking a home equity loan or line of credit is a choice, not a necessity.

Function

The biggest difference between mortgages and home equity loans and credit lines is that a mortgage has just one purpose: Purchasing a house. Home equity loans, Investopedia states, utilize the equity in your home–the value of the house less the amount you owe on the mortgage–as collateral on a loan you can use for other purposes. By way of example, because the rate of interest is usually lower than credit cards and other loans, many homeowners use home equity loans to pay off their cards, lower their yearly premiums and consolidate debts into a single loan payment.

Procedures

Whether you’re taking a mortgage or a home equity loan, you are going to face a good deal of the same paperwork, Investopedia states. Together with that, you are going to pay a great deal of the very same charges for processing your application, name search and an appraisal to make sure that your house is worth the loan which you’re taking out.

Comparisons

1 alternative to a home equity loan is a”cash out refinance” loan: Instead of merely refinancing your existing mortgage, you simply take out a larger mortgage by utilizing a part of your home equity, BankRate says. This offers you additional money much like a home equity loan, but usually at a lower rate of interest.

Factors

A cash-out refinance might offer lower rates than a home equity loan, Bankrate states, but if rates are higher than your existing mortgage, it might be a mistake to refinance. In that scenario, together with your equity to get a loan or line of credit and leaving your mortgage unaffected might be a much better option.

Caution

Few individuals can avoid taking out a mortgage should they purchase a house, but a home equity loan is another story. If you’re going to save money by minding your credit cards to get financing, Investopedia states, that might be a good deal, or if you’ve got a major investment beforehand such as your kids’ college fees that you’ll use your equity to pay, it might be worth it. You might be putting your house in danger When it’s spending for fun. The same as a mortgage, should you default on a house equity loan, you can lose your property.

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