Home Equity Loans vs. Mortgages: An Overview

Home equity loans and traditional mortgage loans both use your home as collateral, or backing, for the debt. This means that the lender can seize the home if you don't keep up with your pay♈ments. However, they are used for different purposes and at different stages of the home buying and homeownership process.

How Mortgages Work

Mortgages are loans to buy a home or other piece of property. They come in two basic types: 澳洲幸运5开奖号码历史查询:conventional mortgages and government-backed mortgages. In both cases, the lender is a financial institution, such as a bank or credit union. While the U.S. government backs♈ some mortgages as a way of lessening lenders' risks and making mortga𝔉ges more widely available, it does not issue them.

Conventional mortgages require that you make a 澳洲幸运5开奖号码历史查询:down payment, covering a portion of the home's purchase price. The mortgage will▨ cover the rest. For example, if you're buying a $300,000 home and make a 20% down payment of $60,000, your mortgage will be for $240,000.

Although 20% down payments were once standard, many lenders will now accept considerably lower ones. According to a 2023 National Association of Realtors study, the typical down payment for first-time homebuyers was 8%, while for repeat buyers it was 19%.

A 2024 study from the same organization found that the median down payment overall was 15%, but that it varied significantly by age group. For example, among buyers age 25 to 33 the median was 10%, while buyers 69 to 77 put down a median of 35%.

However, it's worth noting that if you put less than 20% down on a conventional mortgage, you will typically have to pay for 澳洲幸运5开奖号码历史查询:private mortgage insurance (PMI) 🐼until your equity in the home reaches that level.

Government-backed mortgage options include 澳洲幸运5开奖号码历史ꦏ查询:Federal Housing Administration (FHA) mortgages, which allow you to put as little as 3.5% down. U.S. 澳洲幸运5开奖号码历史查询:Department of Veterans Affairs (VA) loans and U.S. 澳洲幸运5开奖号码历史查询:Department of Agriculture (USDA) loans require down payments as low as 0%.

The interest rate on a mortgage can be fixed for the entire term of the loan or adjustable, in which case it will change periodically. The most common terms for mortgages are 15, 20, or 30 years, although there can be ಌother terms available.

Before getting a mortgage, it's important to shop the best mortgage lenders to determine which one will give you the 澳洲幸运5开奖号码历史查询:best rate and loan terms. A 澳洲幸运5开奖号码历史查询:mortgage calculator can also be useful in comparing how different interest rates and loan terms would affect yꦛour monthly payment🧜.

How Home Equity Loans Work

A home equity loan is also a type of mortgage. However, home equity loans are for situations when you already own a property and have accumulated a sufficient amount of equity in it. Lenders generally limit the amount of a home equity loan to no more than 80% of the total value of your equity.

Home equity loans are secured by your equity, which is the difference between the property's value and any existing mortgage balance. For example, if you owe $150,000 on a home valued at $250,000, you have $100,000 in equity. Assuming that you have 澳洲幸运5开奖号码历史查询:good credit and that you otherwise qualify, y🦄ou should be able to get a home equity loan using a portion of that $100,000 as collateral.

Like a traditional mortgage, a home equity loan is an 澳洲幸运5开奖号码历史查询:installment loan that has to be repaid over a fixed term, which can range from five to 30 years. Home equity loans typically have a fixed, rather than adjustable, interest rate.

In addition, home equity loans often have 澳洲幸运5开奖号码历史查询:hi💙gher interest rates꧂ but lower closing costs than traditional mortgages.

Tax Deductionsꦉ for Mortgages and Home Equity Loans

The interest on both mortgages andꦛ 🎀home equity loans can be tax-deductible in some instances.

In the case of mortgages, interest is deductible on up to $750,000 in debt for married couples filing jointly and $375,000 for singles. However, it is deductible only if you 澳洲幸运5开奖号码历史查询:itemize your deductions on your tax return rather than taking the standard deduction. Since the standard deduction was substantially raised in 2017, many taxpayers find it more advantageous simply to take it instead of itemizing. But it's worth doing the math to see. (Different maximums apply to mortgages issued before Oct. 13, 2017.)

Home equity loan interest is deductible up to those same amounts, but only if you use the money to "buy, build, or substantially improve your home," as the Internal Revenue Service puts it. That restriction is scheduled to expire in 2025 unless Congress renews it; if it expires, home equity loan interest would be deductible regardless of what you use the money for. As with mortgage interest, you have to itemize deductions in order to claim home equity loan interest on your taxes.

Note also that these limits apply to all of your housing debt combined for your main home and any second home. So if you have both a regular mortgage and a home equity loan, you can only deduct the interest on up to $750,000 (or $375,000) of your total debts.

The Bottom Line

Both mortgages and home equity loans can be useful—the former for buying a home and the latter for tapping existing home equity for other expenses. As with any kind of loan, it's important not to become overextended, just in case you suffer some financial reversal and cannot keep up with your debt payments, especially because your home could be at risk.