You’ve finally decided to purchase your first home. As you try to traverse the home buying process, you come across two terms that appear to be the same. But, they’re often used in different situations and so you aren’t quite sure.
Home loan. Mortgage.
Although many people use the terms interchangeably in normal conversation, they aren’t the same thing. The reason for the confusion may be that home loans and mortgages work hand-in-hand to finance your new home.
Knowing the differences can help homeowners better understand the home financing process. How are these things different?
Continue reading to learn key differences in a home loan vs mortgage. Also, learn about the most common home loan types and how they differ.
What Is a Home Loan?
The term “home loan” refers to the actual money you take out to purchase your home. These loans are usually only used for residential properties.
A home loan can be received through a financing company like Loanpal or through other sources. There are different types of home loans that can be taken out, which may have an adjustable or fixed interest rate.
What Is a Mortgage?
In contrast, a “mortgage” refers to the legal documents you sign to show you’ll repay your home loan. These documents legally verify your obligation to repay the lender in full. The home you purchase is collateral and can be repossessed by the lender if you don’t make your payments.
Types of Home Loans Available
At the heart of this discussion, a mortgage will always mean the same thing. The terms and conditions of the mortgage may vary, but it will always refer to the legal documents that go hand-in-hand with your home loan.
By contrast, there are several types of loans you could take out on your new property. While they all serve the same purpose (to finance your new home), the process may be slightly different for each one. The four most common home loan options are discussed below.
These are loans that conform to the basic standards of either Fannie Mae or Freddie Mac. Conforming home loans will be equal to the loan limit set, or lower.
These are loans that don’t conform to the basic standards of either Fannie Mae or Freddie Mac. Jumbo loans exceed basic loan limits and are usually only used to purchase high-end or expensive real estate.
The United States government backs these loans. The guidelines for qualifying are among the strictest, and so, they are harder to obtain. Due to the more stringent guidelines, these loans often come with lower interest rates versus other options.
These loans are backed by the mortgage company themselves and are what most people think of when they hear the term home loan. To make up for the risks taken by the lender, these mortgages have comparatively higher interest rates.
Do You Have More Questions About a Home Loan vs Mortgage?
Although they’re often used to mean the same thing, there are several key differences between a home loan vs mortgage. These differences are discussed above.
Do you have more questions? Look through our other blog posts. You’ll find ample information on closely related topics.