Why Personal Loans are Much Smaller Than Mortgages and Home Equity Loans?


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If not for loans, many Americans would have suffered, terribly. Loans have been America’s saving grace since time immemorial. Thanks to mortgage loan, an individual can own a house of his own; free from rent and landlord issues. Loans have, to some extent, made things easy for people.

Personal loans are much smaller than other loans due to the fact that it is a short-term loan that comes with a repayment period of 3-7 years, unlike home equity loans which can last for as long as 20-30 years.

Personal loan, mortgages and home equity are different types of loans. These loans help financially stricken individuals take care of some financial obligations. These obligations vary for each borrower. For some, it could be to fund an emergency medical bill or a car purchase; while for others, it could be to finance a home renovation or purchase, etc. Each of these loans have their purposes and can be obtained if an individual meets all the requirements of the lender. Well, it may sound simple to you, but acquiring a loan isn’t as simple as you think. Why don’t we have a look at these loans?

Why Personal Loans are Much Smaller Than Mortgages and Home Equity Loans?

Personal loans are only available for personal borrowing. On the other hand, mortgage are loans taken to finance the purchase of a home. Finally, home equity loans which can also be regarded as second mortgage, are loans that can be accessed if you have equity on your house. This type of loan allows you to borrow against the value of your home minus the mortgage balance of your property.  Of all the three mentioned loans, personal loan is the smallest.

If personal loans were to be a long-term loan, perhaps, it won’t be as small as it is. But since it’s a short-term loan, lenders are only willing to lend borrowers a small amount of cash they feel should be payable within the short repayment period.  

What are Personal Loans?

A personal loan is an unsecured type of loan. This denotes that, unlike a mortgage loan, there exist no collateral that the lender can use as a leverage should you decide not to pay the loan. This alone is a primary feature of a personal loan.

There are other features of this type of loan:

  • Most lenders shy away from taking personal loans because it seems to be riskier. This type of loan boast of higher interest rate than mortgages or auto loans.
  • Processing a personal loan application doesn’t take long because it doesn’t involve a collateral like mortgage loan.
  • When it comes to personal loans, their interest rate depends on the credit score of the borrower.
  • Personal loans also have a minor or zero set-up cost.

Personal loans also have a shorter repayment period than mortgage loans or second mortgage. The repayment period for personal loans could be between one to five years or it can be as long as 12 years for loans of higher amount. When it comes to interest rates, this loan almost often comes with fixed interest rates. The interest rate of this type of loan ranges from 6% to 36%. When it comes to mortgage, the interest rate range is usually much smaller.

Personal loans can be obtained from either a bank, a credit union or online lender. After your loan application must have been processed and approved, you are to repay the loan and interest rate by making fixed monthly payments, or installments.

When it comes to approving a personal loan application, lenders look at several factors like your credit score, credit report, credit mix, debt-to-income-ratio, etc. If peradventure you have an enticing credit score, you will get the loan at a lower interest rate. Applicants who are deemed unqualified for unsecured loan may be given secured or co-signed loans.

What are Home Equity Loans?

A home equity loan is quite different from a personal loan. This type of loan is a secured loan because it has a collateral which is your home. A home equity loan is simply a one-time loan that can be acquired by using your home as a collateral. If you end up not paying back the loan as agreed, you may end up on the street without a home.

Home equity loan is similar to a mortgage, the only difference is that you can only obtain this type of loan after you have purchased and amassed equity on the property.

Who is Eligible for A Home Equity Loan?

Just like other types of loans, you need to satisfy some requirements before you qualify for this loan. The requirements needed to qualify for this type of loan may be different from that needed to quality for a mortgage. For instance, when it comes to mortgage, a lender may consider closed account, or he may be benevolent enough to allow you change your mortgage due date, but for an equity loan, this may be different.

To qualify for this type of loan, you need home equity. Lenders want to see that you won’t have issues with repaying the loan back at the agreed time. You need to have a good job, a good credit score, including a good payment history.

What can you Do With Home Equity Loan?

There are certain things you can and cannot do with this type of loan.  Below are a few of the things you can do with a home equity loan.

  • The amount of money derived from this loan can be used to finance the upgrade of your home.  You can also use it to settle other primary expenses and consolidate debts with higher interest rates.
  • When it comes to second mortgage, you can decide to use an apartment that you reside in as your main residence as collateral. This could be single-family homes, planned unit developments, etc.

What can’t be Done With Home Equity Loan?

  • It is very impossible to obtain a home equity loan that is more than the value of your house. It has to be smaller.
  • Home equity loan amount added to the amount of cash you owe as mortgage generally must attain a figure that is lower than 90 % of your home’s worth.

Is it Better to Get a Personal Loan or Home Equity Loan?

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A personal loan and a home equity loan are two different types of loans that are obtained for two different purposes. Obtaining a personal loan isn’t easy as you have to meet some requirements and some due processes needs to be followed. It is best you are aware of the requirements before you decide to tender your personal loan application to any lender to save yourself the stress and probably the embarrassment.  

For your personal loan application to be approved, banks need to consider some factors like your credit score, credit history, etc. It is also the same with an equity loan. The whole process is carried out to determine the creditworthiness of a borrower. No lender would want to work with an individual who has a bad track record when it comes to paying back his debts.

Personal loans and second mortgage can be used for similar purposes even if they aren’t similar. Since they can be used for identical purposes, when you are faced with the choice of selecting between a personal loan and a home equity loan, which should you consider?

If you need a large amount of cash, you definitely should be considering a home equity loan. It comes with smaller interest rates and monthly payments. This loan is also secured with a collateral. But if you need money to take care of a small issue, it is best you consider a personal loan.

One thing you should know when considering both loans is that, you are likely to lose your home if you don’t pay up your home equity loan. But a personal loan is an unsecured loan, this means that there is no collateral involved. The bottom line is, one cannot categorically state which of the loan is better, you just have to select that which can help your financial situation without putting you in a tight spot.

Which is Better, Cash-Out Refinance or Home Equity Loan?

Cash-out refinance and home equity loan are two diverse type of loan with slight similarities. Cash-out refinance involves the refinancing of your current mortgage loan into a more substantial mortgage, thus, presenting you with a cash amount that is similar to the raise in your mortgage amount. You can either select from a fixed or a modifiable rate including other terms. On the other hand, home equity loan utilizes your home equity to make a new loan that is different from your existing mortgage. When it comes to selecting between these loans, people are often not sure which is better.

The best for you would depend on your circumstances. Cash-out refinance would serve you well if you qualify for a lower interest rate than you have on your existing mortgage, while if you have accumulated several equity on your home and you don’t seem to qualify for a lower interest rate it is best you consider home equity.

Why is Home Equity Loans a Bad Idea?

Home equity loan has several uses. It can be adopted in paying off credit cards and consolidating debts, it can take care of those emergency expenses of yours, it can also be used to purchase a new car, among other things. Home equity loan may be good because of a couple of reasons, but one thing you should know is that whatever has an advantage also has a disadvantage.

Home equity is a bad idea mainly because failure to repay the loan may result in you being homeless. This is simply because home equity is a secured loan. And a secured loan as we know has a collateral as its requirements. If you end up not paying up the debt you may lose your most significant asset.

This doesn’t denote that you can’t adopt this loan and end up paying it off without losing your home. You just have to be very cautious, review the risks involved and also do the same to the benefits. Is such a loan worth the risk of becoming homeless?

Mortgage , equity , and other types of loans may be hard to acquire but when you contact the right lender, things may become easy. That is why is advised that you scout for a benevolent lenders and ask questions so you don‘t regret at the end. Find out what happens when your mortgage due date falls on a weekend, also find out if it’ll be possible for you to get a mortgage with no employment but a substantial deposit. Do your homework well so you have the required information and facts to avoid any mistakes or embarrassment along the line.

If you have a credit report that have been damaged by late payments, you shouldn’t give up. Search for a lender who can offer you mortgage with late payments on your credit report. Though this may be tough but trust me, it isn’t impossible.

Conclusion:

Based on findings by Zillow, about 70% of home owners owe debt on a mortgage loan as it remains one of the best ways to acquire a house in the United States of America. When paying back a mortgage loan ensue you do your best to ensure that you give it your best to avoid punishments. Unpleasant sanctions are directed towards you when you become 30 days late on mortgage not to talk of when you are 60 days late on mortgage.

If you are finding it hard to settle your mortgage due to credit card debt or any other debt, you should consider seeking for a professional help. This help comes in the form of a programs that help individuals struggling with debt. Different programs have helped thousands of people.

Another way to settle your debt is via debt consolidation. In considering this method, you must know that it comes with pros and cons. For instance, a $50,000 debt consolidation loan has its pros and cons so does that of $10,000 and so on (you can read full post by clicking on this link). So be wise and choose your options wisely.

Also, mind how you spend with your credit card because if care is not taken, it could land you in huge debt in a jiffy. You can hide your credit card if you can’t control your spending habits.

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