Mortgage and home equity loan

Question

Hi.What's the difference between  mortgage and home equity loan ?Thanks in advance

AlpheccaStars · Accepted Answer

Mortgage:

Suppose John and Susie are renting an apartment and are planning a family. They want to buy a house, but do not have enough savings to pay 100% of the asking price. The house they like is for sale at $100,000.

So they go to a bank and request a mortgage. There are different kinds of mortgages. Traditional mortgages required a down payment of 10%. They get approved for a mortgage of $90,000 and have saved $10,000. They buy the house for $100,000. The owner gets his $100,000 - the combination of the 90,000 from the bank and 10,000 from the John and Susie. John and Susie pay monthly on the mortgage for the term of the mortgage, and also pay interest at the agreed rate.

Home equity loan:

George and Mary are an older couple. Their two kids are in university. They live in a house that they bought 20 years ago, and still are paying monthly on the 30-year mortgage. They got a $100,000 mortgage to buy the house, and have paid over those 20 years a total of $60,000 on the principal, so the balance on their mortgage is $40,000. But they live in a nice location, and the house has gone up in value to $150,000. They really need some money to pay for their daughter's and son's university education, which will cost $40,000.

They could sell their house for $150,000 and take the balance (the equity) of $110,000 and use $40,000 to pay for the education. But they want to stay in the house and not sell it. So they go to the bank with this "equity" of $110,000 and ask the bank for a $50,000 loan with their home as collateral. The bank loans them the money, with a term and interest rate. So now they owe $90,000; $40,000 on the first mortgage and $50,000 on the home equity loan. They make two payments each month. The $50,000 is used for a nice vacation and the kid's college expenses.

Mortgage and home equity loan

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