A letter of hardship, also called a letter of explanation, is an official letter that you write to your lender to explain your current financial situation and show that you are unable to repay a debt such as your home loan. Up Next: Catching Up With Late Mortgage Payments These letters are used to request […]
Know the Difference: Mortgage vs. Home Loan
Sometimes, people can be tempted to use the terms “mortgage” and “home loan” interchangeably when discussing getting mortgages in KC. While they are very similar, there are some key differences that you, as a borrower, need to be aware of.
Home Loans & Mortgages are Closely Intertwined
The reason home loans and mortgages are so often used interchangeably in conversation is because of how closely their related and work together. For example, when you take out a home loan to purchase your home, you then sign for a mortgage agreeing to pay back the home loan in monthly payments. In order to understand how your home buying process works, you must understand the difference.
Home Loans are What You Borrow
A home loan is the actual money that you take out to pay for your home. Home loans have either adjustable or fixed rates that determine your mortgage rate. Home loans are generally only used to purchase a residential home.
There are many different types of home loans and the home loan you choose is determinate on your personal situation and what you can afford:
- Conforming: a loan that conforms to guidelines set by Freddie Mac or Fannie Mae and is equal to or less than the loan limit.
- Non-conforming: also known as a jumbo loan, a loan that doesn’t conform to Freddie Mac or Fannie Mae guidelines and exceeds the loan limit. Usually used to pay for high-end real estate.
- Government: a loan that is backed by the U.S. government and generally has stricter qualification guidelines, but lower rates.
- Conventional: a loan that’s insured by the mortgage company and thus has higher rates to offset the risk to lenders.
Mortgages are Legal Documents
On the other hand, mortgages are types of loans that are secured for real estate that, as the borrower, you need to pay back in full in order to fully own the property. Unlike a home loan, a mortgage is the legal document that shows your agreement and obligation to repay your debt to the lender.
The property you purchase is the collateral to help the lender ensure that you pay your mortgage payments. If you do not pay your mortgage payments, the bank can foreclose on your property and sell it to someone else. Mortgages can be used to purchase any piece of real estate, be it residential or commercial.