Many people choose to build their home by taking a loan. However, many people are unaware of the difference between a mortgage and a home loan. Although both terms are regularly encountered in the area of real estate financing, there are subtle differences and a substantial impact on the financial decisions that borrowers make. To help you navigate the complexities of property finance, Brick & Bolt will explore the differences between mortgage loan and home loan in this blog.
Mortgage Loans
When it comes down to it, a mortgage loan is a loan that is designed particularly for the purpose of purchasing real estate. The loan is secured by the property that is being acquired, which performs the function of collateral for the loan. During the course of a defined time period, which typically spans several years, the borrower makes a commitment to return the loan amount, together with the interest.
Let’s Explore Some Additional Details About Mortgage Loan vs Home Loan:
Mortgage Rates:
Mortgage loans often offer competitive interest rates, which are impacted by a variety of factors, including the state of the economy, price increases, and the creditworthiness of the borrower. Borrowers have the option of selecting either a fixed-rate mortgage, in which the interest rate remains unchanged during the duration of the loan, ensuring stability and predictability in monthly payments, or an adjustable-rate mortgage, often known as an ARM, in which the interest rate may fluctuate regularly based on market indicators.
Loan-to-Value Ratio (LTV):
Lenders evaluate the loan-to-value ratio, which calculates the ratio between the amount of the loan and the value of the property that has been purchased. It is possible that a lower loan-to-value ratio will result in more favourable loan terms, such as lower interest rates and reduced requirements for private mortgage insurance (PMI). This is because a lower LTV ratio signifies a lesser risk for the lender.
Private Mortgage Insurance (PMI):
Borrowers who make a down payment that is less than twenty per cent of the total purchase price of the home may be compelled to pay for private mortgage insurance. PMI safeguards the lender against the possibility of the borrower defaulting on the loan. They may be eligible to request the removal of private mortgage insurance (PMI) after the borrower’s equity in the home reaches twenty per cent, which will result in a reduction in their monthly payments.
Closing Cost:
It is important for borrowers to ensure that they have sufficient funds in their budgets to cover the closing charges associated with the mortgage loan. The fees associated with the loan origination, the appraisal, the title insurance, the attorney fees, and the prepaid property taxes and insurance may be included in these charges. For borrowers, it is vital to check the Loan Estimate that is provided by the lender. This document provides an outline of the projected closing costs, and it is important for them to budget accordingly.
List of Important Elements of Mortgage Loans:
Secured by Property:
The property that is being acquired acts as collateral, which enables the lender to reduce the risk that is involved with the loan.
Interest Rates:
The interest rates that are associated with mortgage loans are normally either fixed or adjustable respectively. Fixed rates are those that remain the same during the duration of the loan, providing stability for the borrower. Adjustable rates, on the other hand, might change depending on the financial market conditions.
Long Terms:
There are a variety of loan lengths available, with the most frequent range being between 15 and 30 years for mortgage loans. When the loan is for a longer period of time, the monthly payments are lower; nevertheless, the overall amount of interest paid over the course of the loan’s lifetime is higher.
Down Payment:
In most cases, borrowers are required to make a down payment, which normally falls within the range of three per cent to twenty per cent of the total purchase price of the home. However, there are some programs that permit lesser down payments.
Home Loans
A home loan is a more general term that encompasses a variety of loans used to purchase, construct, remodel, or refinance a home. Although mortgage loans are included in the category of house loans, the latter category also encompasses other forms of financing, such as home equity loans and home equity lines of credit (HELOCs).
Important Components of Home Loans
Home Equity Loans:
Homeowners who have equity in their properties may be eligible for home equity loans, which enable them to borrow money against the value of their homes but come with certain requirements. As a result of the fact that these loans often come with fixed interest rates and fixed monthly payments, they are excellent for one-time expenses such as home improvements, debt consolidation, or significant purchases.
Home Equity Lines of Credit (HELOCs):
HELOCs are a type of credit line that is comparable to home equity loans in that they enable homeowners to access their home equity, but they offer greater flexibility. For the duration of the draw period, home equity lines of credit (HELOCs) perform the function of revolving lines of credit, enabling borrowers to borrow funds as needed, up to a predetermined credit limit. Borrowers are only required to pay interest on the amount that they borrow while using a home equity line of credit (HELOC).
Refinancing:
It is also possible for homeowners to use home loans to refinance their existing mortgages. This can be done for a variety of reasons, including obtaining a lower interest rate, shortening the loan term, or gaining access to equity for other purposes. Refinancing helps borrowers save money on interest payments over the course of the loan’s term, which can free up funds that can be used for other financial goals.
Tax Implications:
Taking into consideration the tax implications of home loans, particularly with regard to the deductions for mortgage interest, is a vital step for borrower consideration. It is possible for borrowers to deduct the interest they pay on their primary dwelling as well as, in some circumstances, the interest they pay on a second home or investment property using the tax regulations that are currently in effect. On the other hand, because tax regulations are subject to change, it is recommended to seek the advice of a tax counsellor in order to receive individualized guidance.
Key Features of Home Loans:
Versatility:
In contrast to mortgage loans, house loans can be utilized for a variety of purposes other than the purchase of a home. They might be used to finance home improvements and repairs, or they could even be used as a way to gain access to equity that has been built up in the property.
Secured and Unsecured Options:
While mortgage loans are always secured by the property, home equity loans and home equity lines of credit (HELOCs) can be secured (by the equity in the home) or unsecured, depending on the needs of the lender.
Terms and Interest Rates:
The terms and interest rates for house loans are different for each form of loan, and the interest rates are also different. When opposed to conventional mortgage loans, home equity loans and home equity lines of credit (HELOCs) may have differently structured payback terms and interest rates.
Flexibility in Use:
Home loans provide homeowners with the ability to spend their finances in a manner that is flexible, which makes them an invaluable resource for homeowners who are trying to leverage their home equity for a variety of financial requirements.
Special Focus: Home Loans for New Construction & Renovation
- The bank disburses funds in stages as the construction progresses.
- You must submit approved building plans and a cost estimate before getting the loan.
- Renovation loans can be used for repairs, extensions, or improving interiors.
- The interest rate is almost the same as a regular home loan.
- Renovation loans usually have a shorter repayment period than construction loans.
What is the Difference Between Home Loan and Mortgage Loan
The following are difference between home loan and mortgage loan in India:
| Aspect | Mortgage Loan | Home Loan |
| Purpose | Can be used for purchasing, renovating, refinancing, or raising funds against property | Specifically used for purchasing or constructing a residential property |
| Collateral | Always secured against an existing immovable property | Secured against the property being purchased/constructed |
| Interest Rates | Varies; generally higher than home loans due to broader usage | Usually lower, offered as fixed or floating rates |
| Loan Terms | Typically 5 to 15 years | Longer tenure, generally 10 to 30 years |
| Down Payment | Not usually required, as loan is given against existing property | Usually required (10–25% of property value) |
How to Qualify for a Construction Loan: A Quick Checklist
- Have a steady income and a good credit score to show you can repay the loan.
- Own the land or have legal rights to the plot where you want to build.
- Get an approved building plan with estimated costs from a licensed architect.
- Provide proof of identity and address (like Aadhaar card, PAN, utility bill).
- Submit your income proof, such as salary slips or tax returns.
- Agree to receive the loan money in parts as your house gets built step by step.
- Be ready to make a down payment of around 20–25% of the estimated cost.
Home Loan vs Mortgage Loan Eligibility: Credit & Payment Guide
The following is a helpful checklist with key eligibility criteria:
| Eligibility Criteria | Home Loan | Mortgage Loan |
| Credit Score | Minimum ~700+ for good approval | Similar to home loans; usually 700+ |
| Debt-to-Income (DTI) Ratio | Generally below 40%-50% of monthly income | Similar norms, lender-dependent |
| Employment History | Stable salaried or self-employed for 2-3+ years | Proof of income stability required; flexible for business loans |
| Required Down Payment | Typically 10% to 25% of property value | Varies; may be lower if secured by property, else higher |
| Loan Tenure | Usually 10 to 30 years | Usually shorter: 5 to 15 years |
In conclusion, mortgage loans and home loans both have the same objective, which is to make homeownership more accessible; yet, it is essential to have a thorough awareness of the differences between the two in order to make well-informed decisions regarding one’s finances. You may save yourself time, money, and frustration in the long run by being aware of which loan choice is most suitable for your requirements, regardless of whether you are in the market for a new house or thinking about tapping into the equity in your current residence.
Frequently Asked Questions (FAQs)
1. What is the difference between home loan and mortgage loan?
A home loan is specifically provided for purchasing, constructing, or renovating a residential property. A mortgage loan is a broader term referring to any loan secured by property (residential or commercial) offered as collateral, which can be used for various purposes beyond just buying a home.
2. Are the interest rates on mortgages the same for all types of home loans?
No. Interest rates vary depending on the loan type and lender. Home loans generally have lower interest rates compared to mortgage loans (loan against property). Different home loan products like fixed-rate, floating-rate, or home equity loans also have varying rates.
3. If I want to get a mortgage, do I need to make a down payment?
Usually, yes. Standard home loans require a down payment typically between 10% to 25% of the property value. Mortgage loans may have variable down payment requirements depending on the lender and loan type, but collateral is mandatory.
4. Is it possible to use a home loan to fund home renovations?
Yes. Some home loans offer funds for renovation, repair, or extension of existing residential property. There are also specific home renovation loans and home equity loans designed for such purposes.
5. What factors determine my eligibility for a mortgage or home loan?
Lenders consider several factors including employment history, income level, debt-to-income ratio, credit score, and the value and type of the property offered as collateral.
Apoorva H P Achar