Difference Between Home Equity Loans and Home Loans: Which is Right for You?

Whether you're planning to buy a new home or need funds for other purposes, financing options like home equity loans and home loans can help you achieve your goals.

In this article, we'll explore the key difference between home equity loan vs home loan, drawing comparison between them, to help you decide on the right home loan choice.

What are Home Equity Loans?

A home equity financing loan, commonly known as a home equity loan, allows homeowners to borrow against the equity in their homes. This type of loan is secured by the property itself, meaning the home serves as collateral for the loan. Equity is the difference between the market value of your property and the outstanding balance on your mortgage. Let's say your property is valued at ₹1 crore, and your outstanding mortgage balance is ₹50 lakhs. In this case, you have ₹50 lakhs as equity in your property.

With a home equity loan, you take a loan of this equity from banks or financial institutions at a fixed interest rate over a specific period. The loan amount is typically determined based on a percentage of your property's appraised value and the lender's loan-to-value ratio. It's important to remember, if you default, the lender has the right to take possession of your home.

What are Home Loans?

A home loan, also known as a mortgage, is a type of loan provided by banks or financial institutions to help individuals purchase residential properties. Unlike home equity loans, which are secured against existing property equity, home loans allow borrowers to finance the purchase of a new property.

When you apply for a home loan, the lender assesses your creditworthiness and approves a certain percentage of the property's market value as the loan amount. The remaining portion must be covered by the borrower as a down payment.

Key Differences Between Home Equity Loans and Home Loans

Now that we understand the basics of home equity loan vs home loan, let's dive into the key differences between these two financing options:

Which Option is Right for You?

Choosing between home equity loan vs home loan depends on your home loan choice and needs. Here are a few case scenarios to explain it in more detail:

Scenario 1: Renovating Your Home

If you already own a property and want to renovate it, a home equity loan can be a suitable option. Since you have built equity in your property, you can leverage it to obtain funds for renovations. The fixed interest rates and flexible usage make it among the attractive home loan choices.

Scenario 2: Purchasing a New Property

If you're planning to purchase a new property, a home loan is the way to go. It allows you to finance the entire purchase price and spread your repayments over a longer tenure. Additionally, you can benefit from tax deductions on both the principal and interest components of the loan. 

Scenario 3: Debt Consolidation

If you have multiple high-interest debts, such as credit card bills or personal loans, consolidating them into a single home equity loan with a lower interest rate can help you save on interest payments. However, keep in mind that this option puts your property at risk if you fail to repay the loan.

In short, it is essential to consider carefully home loan choices, based on priorities, and long-term plans before making a decision. Consulting with a financial advisor or loan officer can also provide valuable insights in making a final decision between home equity loan vs home loan.