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Home Loan vs Mortgage: What is the Difference?
January 27, 2023 by Hanna Rubio
There is no denying that everyone has this dream written on their bucket list. This is to have their property someday. Where you can build your own family, create memories, and strengthen not just the foundation of your house but also your family. And owning a property is considered a milestone for some. That feeling when you finally got a hold of the first key to a property you can call your own is exhilarating. That piece of metal can give so much happiness and fulfillment.
But, understandably, not everyone is born with a golden spoon. The majority needs to work very hard to get what they want. It takes them hours, days, months, weeks, and years, to finally purchase a property. Blood, sweat, and tears are spent just to finally have their dream houses built. But don't fret! Because there are some ways how you can acquire your dream real estate property while you are still in the process of improving your financial stability.
And that is through home loans and mortgages. These two words are used interchangeably most of the time. That is a common misconception for these words are highly different. This article will help you familiarize yourself and distinguish the key differences between home loans vs mortgage loans.
Here are the key difference between a Home Loan and a Mortgage Loan
Home loans are loans granted to those who wish to renovate or purchase a specific property. The lender will be allowing them to borrow a sum of money that should be used for a residential property like a house and lot for sale in Cavite, condominium units, or townhouses. Aside from that, the fund can also be used for home construction on land that you already acquired. Home improvements are also part of the list. Another thing is that home loans can be used to refinance any existing housing loans.
Moreover, home loans cover at least 90% of the home's market value which makes the loan-to-value (LTV) ratio high. The loan-to-value ratio is basically the percentage that you still need to pay which is also the percentage that you need to borrow to complete the payment of the house. Say, for example, you pay a down payment of 25,000 for a 250,000 property. your LTV is 90% and your down payment covers 10% of your home value. The higher the LTV the higher the risk which is also evaluated by the lenders before they fund a loan. Philippine banks can fund up to 95% of your home value however, you are required to pay a 5% down payment. Interest rates for home loans are 6.5% up to 12%. The loan is usually payable up to a maximum of 30 years.
As a borrower, you should also be aware of the type of loan that you can choose which highly depends on your financial capabilities and personal preference. The first type is conventional which is payable over a period of time with a fixed payment. On the other hand, flexible loans allow you to control your loan interest rates determined by how much you are willing to pay.
A mortgage loan on the contrary is also a loan that allows you to borrow money from a lender which will be used to fund a particular property. The difference between mortgage loan has with home loans is that when the borrower fails to pay on the agreed time, the lender has the legal right to acquire the property in agreement. A collateral is involved in this type of loan. So when you borrow money from a lender, the property is put at stake. This makes mortgage loans secured loans because there is collateral involved in the exchange of funds.
The same with home loans, a mortgage loan can be used to purchase a property like a house and a lot for sale in Cavite, renovate your currently owned home, build your own, or refinance your ongoing mortgage loan to match your current financial capability. With a mortgage loan, 90% of your property's value can be borrowed while you are responsible for the 10% remaining. Lenders are offering an interest rate starting from 3% but it varies depending on the duration of your mortgage payments and the total value of the property.
There are two types of interest rates, fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM). FRM has the same interest rate for the whole duration of your loan. In contrast, ARM has a fixed rate for some years and then a staggered rate for the rest of the loan period. It is also payable for 30 years at maximum.
Factors to be considered and Documents required
You can apply from lenders like banks or other financial institutions that will allow you to borrow money from them. Apart from that, there are things that need to consider before actually applying for a home loan. The first thing is the monthly payment. Before applying for a loan, you should evaluate your budget. Ask yourself if your income is sufficient to cover your monthly income. Next is the down payment for it plays an important role in your purchasing journey. Following on the list is the loan tenure that determines the duration of your loan. Finally, choose the most appropriate interest rate for your loan which vary between flexible or adjustable, and fixed rate.
Although the two are different, they have quite the same requirements for you to be eligible for the loan. The following requirements include:
Photocopy of 1 valid government ID
House loan application form with recent photo
Proof of income
Special power of attorney (if the borrower is an OFW and will be represented by an authorized person)
Certificate of Employment
These are some of the most common documents that will be needed when you are trying to apply for a home loan or mortgage loan. These two words, Home loans, and Mortgage have significant differences. So, if you finally decided to acquire that house and lot for sale in Cavite, you now know better. It's time to finally tick off that dream on your list now with Crown Asia!
Read more: Choosing the Best Banks for your Investments and Loans