‘Mortgage’ and ‘home loan’ are two terms related to purchasing a home or arranging for home renovations. These two are distinctly different and considerably impact your economic stability, but, at times, they are used interchangeably. Comprehending the differences between the two is vital to make an informed decision when investing in your dream home. Also, you must be aware of the way your credit score influences your ability to apply for a home loan. Go for a CIBIL score check free, which is necessary before advancing for a loan application.
In this blog, let us break down the differences between a mortgage and a home loan and discuss the aspects to weigh when selecting a financing option.
About Home Loan
A home loan is an economic product allowing you to borrow funds to buy, build, or renovate your home. By home loan, one usually gets up to 70-90% of the renovation expenses and house value. The remaining amount is given as a down payment by the borrower. In a home loan, the purchased home is often kept as collateral. Home loans also give you an opportunity to tax reductions and other advantages.
A mortgage is a slightly different type of loan in which any other property or asset is kept as collateral. These are known as loans against property. Mortgages are released according to the value of the property. Mortgage loans can be used on any financial burden of your preference.
Differences Between a Mortgage and a Home Loan
Now that we have learned about a home loan and a mortgage, let us understand the difference between the two. Some popular differences include the following:
Home loans can only be taken for the funds for your home. Using funds borrowed for other commitments might be a contract violation and result in penalties.
A mortgage loan can be taken to acquire and use the funds without restriction.
Home loans offer a borrowing of up to 90% of the property’s whole value.
Mortgage loans offer a borrowing of up to 75% of the property’s whole value.
The repayment tenure for home loans is longer, i.e., up to 30 years. A longer repayment period permits more amount borrowed and splits the loan into shorter EMIs.
The repayment period for mortgage loans is shorter, i.e., up to 15 years.
The interest rates of home loans are lower when compared to mortgages owing to usage restrictions.
The mortgages offer an interest rate of 1-3% higher than home loans, as they do not have any usage restrictions. Thus, they attract higher interest rates.
Top-ups are added loans that can be procured over the existing loan. You may rarely get this facility in home loans only if the lender considers that you fit adequately for repayment.
The additional loans are in the form of top-ups, mostly available in mortgage loans. Here you can go in for additional loans over your principal loan with no current paperwork. Top-ups are only given to the people who have received funds less than the mortgaged property value.
The processing fees of home loans are typically 0.8-1.2% of the loan value.
The processing fees of mortgage loans may go up to 1.5% of the loan value.
The Indian government and the Reserve Bank of India (RBI) have generously offered several tax breaks to promote the use of home loans. Under Section 80C, you may claim the removal of INR 1.5 lakh on a home loan principal. Also, you may claim a reduction in the amount of interest under Section 24.
No such tax benefits or reductions are available for mortgage loans due to their conventional nature.
So, do you want to apply for home loan or mortgage? While both a mortgage and a home loan help you get funds, their sophistications greatly differ. The most outshining of the differences between them lies in the usage of their funds. A home loan also enables you to borrow more money for the same amount of value. The interest rates and processing fees of mortgage loans are higher than that of home loans. Additionally, one may go for a CIBIL score check free before selecting between the two. Since both have their own perks, one should understand the difference between them to make the best decision!