Difference between Home Mortgage and Home Equity
In the past, many financial and lending institutions relied chiefly on the customer’s credit scores as a guide to approving loans. But time has proven that even the best of credit standings cannot guarantee full payments from borrowers. With the economic crisis that the world is experiencing, these lenders have become more careful and have required that all their new borrowers provide some sort of security that the money they borrowed would be paid. Often these take the forms of the home mortgage and home equity. These provide the lender the power to gain ownership of these assets once the loan they have granted are not paid within a specified period or number of times.
Characteristics
A home mortgage is the temporary transfer of interest in your home to a lender as a security for the money that he has advanced you. The premise is that upon full payment of the loans and its interest, the said ownership is returned to the borrower. In case of non-payment, the ownership of the house is automatically transferred to the lender. A home equity on the other hand is the market value of all the properties you have inside your house including your home. Most of the time, this home equity serves as a collateral for home equity loans or other types of loans that the applicant or the owner of the house finds helpful.
Ownership
A home mortgage is a temporary transfer. Therefore, the rightful owner of the property during the duration of the loan period is still the owner indicated on the title of the house. However, once a breach in the contract has transpired, like the non-payment of the principal and the interests over a certain period or number of times, the lender may gain full possession of the property or as stated in the contract. On another note, home equity is just collateral for a loan which just serves as a determination of how much a borrower can get. This means that the home equity is not liquid and no transfer of ownership would take place.
Amount of Security
A home mortgage has no computations when it comes to the amount of security the lender could get. They simply hand over the title of the house and once approved, the lender shoulders the losses and reaps the gain of the amount of the house and its fair market value. A home equity is computed by the difference in the property’s fair market value against all outstanding liens. This difference, which equals the home equity, is the basis for the computation of the loan granted to an individual.
Summary
- A home mortgage involves the transfer of interest to the lender as part of the security to a loan he issued to a borrower.
- A home equity serves as a collateral to a home equity loan or any other types of loans that the borrower wishes to apply for.
- A home mortgage transfers all the rights and ownership to the lender in case of breach of contract while a home equity does not involve any transfer of ownership.
