Home equity being a secured option allows lenders to offer more than one options. When you have options to choose from, it is always advised to look in to pros and cons of every option. There is a common misunderstanding seen when it comes to financial decision of going for home equity loan or a mortgage. Both have its own drawbacks and benefits based on different conditions like purpose of the loan.
Home equity loan is the amount borrowed against home as collateral. It is a new loan to be used for major financing be it education, home renovation, or medical bills. A mortgage is transferring the charge of a property to a lender as a security for a debt. A mortgage in itself is not a debt.
Now comes the circumstances at the time you decide to take the loan which would determine what is right for you? If you are trapped in higher interest rates when lenders everywhere are offering lower interest rates, you need to go for mortgage. On the other hand if you need big money for say funding education, buying a car or home repairs, get a home equity loan. These examples are clamorous. There are situations when one may need cash but as much as a home equity could provide. So there is no point in going into debt for nothing. Likewise if the money required can be paid in making a few installments one must go for mortgage.
Mortgage is often chosen where the interest rate offered is low or the monthly payment is low. If market conditions like high interest rates or poor credit scores which hinders one from getting a mortgage at lower rate of interest, home equity loan is the right choice.
In deciding which is the type suits best to your requirements, make sure you compare the cost involved in two alternatives. Do consider the Annual prime rate and other fees and charges involved. You may know that APR for mortgage considers the interest rate charged plus points and other finance charges where as the APR for home equity line of credit is determined based on periodic interest rates and excludes any points or other charges.
In most of the situations the choice is obvious as both the types are for different purposes and different in nature. It is important to evaluate both the options to ensure you make a right choice. It is also advised to make sure that you have evaluated more than one lender. This would give you options. You will get to know what the market conditions are and how you can exploit it towards your benefit.