There are different kinds of loans available in the market, each serving different purposes. Owing to various circumstances and needs in an individual’s life, they may apply for one, at any period of their life. However, before applying for a loan, it is extremely important to have a complete understanding of it, as some of the types are often confusing. One such pair is Home Loan and Mortgage Loan. Used interchangeably at times, both have certain factors that differentiate them. Read on to know more about it.
What is a Home Loan?
In a home loan, the borrower receives funds from the bank to either purchase an existing home or a new one or construct a new home. You can get a home loan to buy a house or renovate an existing one too. This type of loan is typically secured, meaning the lender will hold the home being used as collateral for the loan as security. When the borrower pays back the full loan in equal monthly installments, it is released. The lender has the right to sell the home in order to recoup any outstanding debts in the event that the borrower becomes insolvent and is unable to repay the loan.
The percentage of the total amount that can be financed with a home loan, or loan-to-value (LTV) ratio, is greater and ranges from 85 to 90%. One of the main distinctions between mortgage loans and home loans is this. A house loan also offers the choice between a fixed interest rate and a fluctuating interest rate. In India, a home loan can have a maximum term of 30 years. Home loans also have a processing fee, which typically ranges from 0.5 to 1% of the loan amount.
What is a Mortgage Loan?
Mortgage loans, in contrast to housing loans, are available for any purpose the borrower chooses. It does, however, have one thing in common with home loans—the lender seizes control of the borrower’s property until the loan is fully repaid.
Mortgage LTV ratios range from 60 to 70%. This indicates that only 60–70% of the collateral’s current market value will be available to the borrower in the form of a loan. These loans have processing fees that are normally 1.5% of the loan amount, and there is also a top-up facility available. The borrower can easily obtain additional funding on the current loan using this facility. The term of mortgage loans can last up to 15 years. The interest rates given on mortgage loans are a little higher (between 1 and 4% more) than those for home loans.
Home Loan vs Mortgage Loan
|Considered for the purpose of buying a residential property or a piece of land
|There are no restrictions as such on this kind of loan, and the loan amount can be used for any purpose by the borrower.
|Loan-to-value (LTV) Ratio
|Usually 85-90% of the current market price of the property
|60-70% of the current market price of the property
|Rate of Interest
|Lower as compared to mortgage loans
|1-3% higher as compared to home loans
|0.8-1.2% of the total loan amount
|1.5% of the total loan amount
|The Tenure of the Loan
|Up to 30 years
|Up to 15 years
|Offered under Section 80C, Section 24, Section 80EE, Section 80EEA
|No tax benefits
Both Home Loans and Mortgage Loans serve their purposes well, but it is important to understand both well and consult a financial advisor before applying for one. Although a home loan is a great tool for property buyers, a mortgage loan is preferable if you require quick cash. Therefore, study your situation properly and learn about which type of loan will cater to your needs, resulting in being more effective.
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