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Difference between Mortgage Credit and Home Purchase Credit

Posted by AmorTulum on 9 de March de 2023
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What is the best option for you?

When it comes to buying a property, there are different types of loans you can use. Each has its advantages and disadvantages, so it is important to evaluate which one would be best for your particular situation. Here are some of the main types of credit available:

Bank credit: This is the most traditional type of credit and can be obtained through a variety of sources, such as banks, credit unions and credit cards. Interest rates are usually relatively low, but the requirements are often excessive.

What is a mortgage loan?

A mortgage loan is a contract whereby a financial institution lends you a certain amount of money in exchange for the property itself as security for payment, constituting a mortgage on it. The holder of the loan must repay the capital loaned together with the agreed interest in monthly installments until the expiration of the term. In the event of non-payment, the bank may foreclose on the property as collateral. The mortgage loan is a contract similar to the mortgage loan, with the difference that in this case the entity delivers money to the client without requiring a down payment; the collateral is also real estate.

What are home purchase loans?

Home purchase loans are a type of financing provided by a financial institution, such as a bank, to enable a person to purchase real estate. The borrower receives the loaned capital up to 80% of the appraised value of the property, and in return must pay back the money to the financial institution. The repayment term of this loan is usually between 5 and 40 years, depending on the conditions agreed by the borrower and the bank. As security for the repayment, the borrower offers the acquired real estate property as collateral. In addition, the bank charges interest on the capital loaned, which is paid from the beginning of the loan and for the total capital loaned. Finally, this type of loan can also be used for other purposes, provided that the borrower has a property of his own and sufficient financial capacity.

The differences between a mortgage loan and a loan for the purchase of a home

1. The Objective

The purpose of the different types of home purchase credit is to provide a means of financing the purchase of a home without the need to save large sums of money. This includes mortgage credit, which is a long-term loan secured by an asset, such as your home; working capital credit, which is a short-term loan without the need for collateral; asset purchase credit, which is a medium-term loan to purchase an asset; and pawn credit, which is a short-term loan that is secured by an asset, such as a car. These different types of credit offer different ways to finance the purchase of a home with a specific interest rate and payment terms. In addition, the two mandatory insurances give creditors peace of mind and protect the client’s assets from the risk of non-payment.

2. Type of loan

There are significant differences between a home purchase loan and a home mortgage loan. A home purchase loan is a one-time amount of money given by a bank to an individual who agrees to repay it according to the terms of the contract. On the contrary, a mortgage loan is a financial product in which the financial entity delivers the entire capital to the client at the beginning of the operation, to which interest is added.

In addition, the requirements for the granting of a mortgage loan are usually more demanding than those of a loan for the purchase of a home, but the interest rate is usually lower and the term longer. The mortgage loan is usually intended to finance purchases of real estate by individuals that are characterized by being punctual and of high amounts, and requires having a significant savings to meet the down payment and the costs of management and formalization of the mortgage.

There are also different prepayment costs depending on the type of mortgage loan. For example, there are fixed or variable interest rates, as well as mixed, which apply a fixed rate for a period of the loan term and a variable rate for the rest of the life of the loan.

In summary, there are important differences between a home purchase loan and a home mortgage loan. The former is a one-time amount of money provided by a bank with interest and a fixed term, while the latter is a financial product with more demanding requirements, but with significantly lower interest and a longer term.

3. Creditors

The parties interested in the differences between a mortgage loan and a loan for the purchase of a home are the shareholders, bondholders, participants or contributors of funds, deposit takers, financial institutions and the applicants for the mortgage loan. A mortgage loan has the autonomy to establish its own granting conditions, offers three different types of rates, security of the unpaid balance, the possibility of charging penal interest according to the agreed conditions, and the flexibility of extending the maturity or postponing the payment of installments. On the other hand, mortgage loans are intended to finance real estate purchases and are usually one-time, high-dollar loans. Applicants should evaluate their ability to pay before applying for a mortgage loan.

4. Type of collateral

The differences between the types of collateral for mortgage loans and loans for the purchase of a home are significant. The mortgage loan is a way of obtaining financing by putting up a home as collateral and can be requested for any other purpose that does not involve the purchase of a home. On the other hand, the mortgage is constituted as a guarantee that the debt contracted for the purchase of a home will be repaid.

The purpose of each of the loans is different, the loan with mortgage guarantee can be used for any purpose, while the credit for the purchase of a home is intended to finance the purchase of a home. The repayment term is also different for each of them, the mortgage loan usually has a term of up to 20 years, while the home purchase loan can have a term of up to 30 years.

In addition, the loan with mortgage guarantee allows the application for a maximum financing of up to 40% of the appraisal of the property, while the loan for the purchase of a home can finance up to 80% of the appraisal, depending on the financial institution. Finally, the loan with mortgage guarantee can be requested even if the person is included in a list of defaulters, while in order to obtain a loan for the purchase of a home, the existence of such list is not allowed.

In conclusion, the differences between the guarantee of a mortgage loan and a home purchase loan are very significant. Both have their own characteristics in terms of purpose, repayment term, maximum financing and acceptance of persons included in lists of defaulters.

5. The amount of the loan

Mortgage loans and home purchase loans have differences in terms of loan amounts. Mortgage loans offer up to 95% financing, while home purchase loans offer up to 75%. This means that with a mortgage loan, the customer can borrow up to a higher amount than with a home purchase loan. In addition, home purchase loans offer a fixed interest rate and a fixed payment, while mortgage loans offer a variable interest rate depending on the chosen term, down payment, credit history and level of indebtedness. Finally, mortgage loans also offer the possibility of reducing the interest rate by paying the loan on time. In conclusion, mortgage loans allow for greater financing and offer more options and flexibility in terms of interest rates, while maintaining a fixed payment.

6. Terms

Mortgage loan terms vary from 3 to 36 months, while the 7×5 loan, the Valora loan, the Crédito Pagos Oportunos loan and the Fixed Rate and Fixed Payment loan offer terms of 5, 10, 15 and 20 years. The last two have the feature of reviewing the interest rate for periods of 5 years with the possibility of reducing the interest rate and paying in advance.

7. Interest Rate

In order to compare different loans for the purchase of a home, it is important to consider the interest rate. There are three main types of interest rates applicable to mortgage loans: fixed rate, variable rate and blended rate. The fixed rate is a pre-set interest rate and does not change during the term of the loan. The variable rate can be adjusted each year according to the economic situation. The blended rate combines both interest rates, allowing the applicant to choose the percentage of each rate. In addition, other interest rates are available, such as Crédito 7×5, Crédito Valora, Crédito Pagos Oportunos and the Scotiabank Mortgage Simulator. The interest rate varies according to the term of the home, the down payment, the credit history and the level of indebtedness of the applicant. Therefore, it is important to compare all interest rates and choose the one that best suits your needs and circumstances.

8. Monthly Payments

The monthly payments for the two types of housing loans vary according to the financing term and the financing percentage. With the 7×5 Credit, the monthly payment amount is fixed, while with the Valora Credit, the payment is increasing. For example, if the term is set at 20 years and the financing is 95%, the monthly payment for the 7×5 Credit would be $6,189.87, while for the Valora Credit it would be $6,664.32. In addition, by making 12 consecutive payments on time, the client can reduce the interest rate and prepay the loan.

9. Tax benefits

What are the tax benefits for customers with a mortgage credit and a home purchase credit? Compared to the details, mortgage loans have the advantage of offering tax savings on interest paid during the term of the mortgage. This means that interest paid during the term of the mortgage may be deductible for income tax purposes. On the other hand, home purchase loans do not offer direct tax benefits. However, homeowners can save money on taxes through property depreciation. Home depreciation is also a tax-saving option for owners of rental housing.

10. Insurance

In the United States, different types of insurance are available for financing the purchase of a home. These insurances are characterized by covering a series of eventualities related to the mortgage loan. The following table shows a classification of the available insurances with a brief comparison of them:

Insurance name

Description

Comparison

Life insurance and total and permanent disability

Insurance that covers the loan balance in the event of the borrower’s death or total and permanent disability.

Covers the loan balance in the event of death or disability..

Unemployment insurance

Insurance that covers a certain number of monthly payments in case of loss of employment of the borrower.

Covers monthly payments in case of unemployment.

Damage insurance

Insurance that covers damage to the property that guarantees the loan.

Covers damages to the property given as collateral in case of fire. Possibility of contracting additional coverage.

Factors to consider when choosing between a mortgage loan or a home purchase loan

Features and Requirements

When choosing between a home equity loan and a home purchase loan, there are certain features and requirements to consider. A mortgage loan offers a fixed interest rate and the payment remains constant for the term of the loan. The terms available for a mortgage loan are 5, 10, 15 and 20 years and the financing extends up to 75%. It also offers a special attribute, such as an interest rate review every 5 years. On the other hand, a home purchase loan offers variable interest rates, depending on the term chosen. The terms for home purchase loans are 7, 10, 15 and 20 years, with financing up to 95%. These loans offer a special feature, which consists of a reduction in the interest rate if the customer pays 12 consecutive payments on time. In addition, there are certain requirements to be able to apply for a mortgage loan, such as a minimum age of 25 years, verifiable income of $7,500 without Infonavit support and $10,000 with Infonavit support, minimum 2 years of work experience and good bank credit references. Therefore, when choosing between a mortgage loan and a loan for the purchase of a home, there are certain characteristics and requirements that must be taken into account to determine which is the best option for each person.

types of loans

There are two main types of loans to finance the purchase of a home: the mortgage loan and the home equity loan. Both have their advantages and disadvantages, and it is important to consider all factors to choose the best loan for your financial situation and needs.

A mortgage loan is a long-term loan used to finance the purchase, expansion, repair or construction of a home, sites, offices or commercial premises. The bank grants the loan in exchange for a mortgage guarantee on the purchased property. The loan is repaid in regular installments with interest and according to the conditions established in the contract.

On the other hand, mortgage loans are medium or long-term loans granted for the purchase of a home, either to live in or to rent. In this case, the bank offers a part of the total amount of the credit, which the client can draw at any time during the established term. The interest corresponds only to the amount of money that the client makes use of, and it is necessary to take into account the requirements established for the granting of the credit, which are usually more demanding than those of mortgage loans.

When choosing between a mortgage loan or a mortgage credit, the interest cost, the repayment term, the requirements for granting the loan, the prepayment costs and the amount of capital needed should be taken into account. Even so, it is advisable to make a comparison between the offers of the different banks to find the best option according to the needs of each person.

Loan Amount and Term

When choosing between a mortgage loan and a home purchase loan, it is important to consider several factors, such as term, financing amounts, and interest rate. Mortgage loans usually offer terms of up to 20 years and financing amounts of up to 95%. In addition, many banks offer fixed interest rate schemes with fixed payments, which is ideal for a stable budget. On the other hand, home purchase loans generally have lower financing amounts, up to 75%, and terms of 5, 10, 15 and 20 years. Some loans offer variable interest rates, which means that payments may fluctuate over time. In addition, some banks offer a lower interest rate if the client pays on time for 12 consecutive payments. Therefore, when choosing between a mortgage loan or a home purchase loan, it is important to evaluate the term, financing amounts and payment schedules to ensure that the product that best suits one’s financial needs is selected.

Guarantees and Insurance

When it comes to choosing between a mortgage loan and a home purchase loan, it is important to consider the different insurance and guarantees offered.

The main difference between a mortgage loan and a home purchase loan is the use of the property as collateral. A mortgage loan is granted for the purchase of a home and the real estate is used as collateral. A home purchase loan, on the other hand, is not granted for this purpose and therefore does not require the use of the real estate as collateral.

In addition, insurance and guarantees vary according to the type of product. For mortgage loans, insurance such as life and total and permanent disability insurance, unemployment insurance, damage insurance and fire insurance are required. These insurances cover the loan balance in case the borrower dies or suffers a disability, loses his job, suffers damage to the property securing the loan or suffers a fire.

On the other hand, loans for the purchase of a home do not require the use of the property as collateral, but rather the presentation of a personal guarantee or a guarantor. The interest rate is usually higher than that of mortgage loans and the repayment terms are shorter.

In short, when choosing between a mortgage loan and a loan for the purchase of a home, it is important to take into account the insurance and guarantees offered, as well as the interest and repayment terms. This will allow the applicant to choose the product that best suits his or her needs and circumstances.

Interest rate

The interest rate is one of the most important elements to consider when choosing between a mortgage loan or a loan for the purchase of a house. The interest rates applicable to mortgage loans are classified as fixed rate, variable rate and mixed rate. The fixed rate is the one that is agreed upon when the mortgage loan is requested and does not change, while the variable rate can be modified each year depending on the economic situation. On the other hand, with the mixed rate, the variable and fixed rate are combined according to the applicant’s interests. In addition, the cost of a mortgage loan is determined by the interest rate, term, commissions and insurance, being the CAT (Total Annual Cost) an indicator that summarizes in a single number the annual cost of the loan and that will allow comparing different options. On the other hand, loans for the purchase of a house are characterized by having a lower interest rate, although it must be taken into account that a higher guarantee is required. Thus, it is important that those interested make a comparison between both options to choose the one that best suits their needs.

Financing options

What are the other financing options available for buying a home? Comparative options range from traditional mortgage loans with fixed and variable rates, to mortgage loans with mixed rates, with the option of requesting grace periods to defer payment of installments. In addition, there are special financing schemes such as loans to purchase new or used homes, mortgage loans for small businesses or the self-employed, and loans to finance the purchase of real estate by individuals.

Type of mortgage

When it comes to financing the purchase of a home, there are three types of mortgages: fixed interest, variable interest and mixed.

The fixed-rate mortgage offers a fixed interest rate and fixed monthly payment throughout the life of the loan, generally with a higher rate than the variable rate and a shorter amortization period.

On the other hand, the variable interest mortgage is linked to a reference index such as the Euribor, to which a differential is added. This mortgage can be affected by possible changes in the economy, so there is a risk that the amount of the monthly payment may increase.

Finally, the mixed mortgage offers a fixed rate for one term and a variable rate for the rest of the life of the loan. This combination of interest rates offers an interesting alternative when financing the purchase of a home.

FREQUENTLY ASKED QUESTIONS

What is the difference between a mortgage loan and a home purchase loan?

The main difference between a mortgage loan and a home purchase loan is the fact that with a mortgage loan the bank provides the capital to the customer in a lump sum, while with a home purchase loan the bank provides the capital as it is required. A mortgage loan is mainly used for the purchase of a property, while a loan is a more generalized product that serves to finance other projects, such as a renovation or the start-up of a business. In addition, the interest to be paid on the capital varies between the two financial products, as do the requirements for accessing them. Finally, it is easier to change banks or modify the conditions of the mortgage than it is for a loan, since the latter requires cancellation fees and the cost of formalizing a new one.

How do the payment terms of a mortgage loan and a loan for the purchase of a home compare?

The payment terms of a mortgage loan and a home purchase loan are compared and contrasted in the following way: the mortgage loan usually has a longer payment term, since the financial entity delivers the total amount at the beginning of the operation. On the other hand, the mortgage loan implies a shorter term, since the client has the part of the granted amount that he needs at any time within the term. In addition, the credit customer has the possibility of requesting an extension of the maturity or a grace period for the payment of the installments. Finally, in the case of a mortgage loan, interest is paid on the entire debt, whereas in the case of a loan, interest is paid only on the amount that the customer uses.

What are the requirements to apply for a mortgage loan and a loan for the purchase of a home?

The requirements to apply for a mortgage loan and a home purchase loan are as follows:

Have a good credit history. This means that when you have acquired obligations, you have fulfilled them in a timely manner. The bank will consult your credit bureau to review this information.
To have initial capital. For this you will need at least 10% to 20% of the value of the property.
Be of legal age and have sufficient income. The bank will evaluate your financial capacity according to your age.
Project your income, so that the monthly payment you are going to pay is no more than 30% of your income.
Review the specific conditions of the loan. Find out its interest rate, administrative expenses and associated insurance and if it will be possible to make payments in advance.
Calculate the total cost of the loan, so you know the amount you will end up paying.
Make sure that the commercial loan covers the amount needed for the property.
Apply to more than one bank to compare the best offers.
Apply for unemployment insurance.
Prepare the necessary documentation to apply for the loan.
Perform an analysis of the financial situation before applying for the loan.
Review the details of the deed before signing.

What are the costs associated with a mortgage loan and a home purchase loan?

The costs associated with a mortgage loan and a home purchase loan vary depending on the lender, the type of loan and the amount requested. As a general rule, mortgage loans require interest, commissions and insurance. Interest is the cost paid by the client for being able to use the money from the financial institution. The commissions vary according to the financial entity and may include opening, constitution, administration, study and early cancellation commissions. Meanwhile, home purchase loans must take into account additional costs such as fire, theft and earthquake insurance, among others. In addition, a down payment is required that usually varies between 20% and 30% of the value of the property.

How is the interest on a mortgage loan and a loan for the purchase of a home calculated?

Step 1: Select the type of interest rate. The type of interest rate depends on the financial institution with which the loan is arranged. The three interest rates available are fixed rate, variable rate and blended rate.

Step 2: Calculate the term in which the money will be repaid. The maximum term to repay the mortgage loan in Spain is 40 years, and each term will influence the interest rate you are given.

Step 3: Calculate the interest rate. The interest rate is calculated based on the selected interest rate, the term set for the loan repayment and the interest that will be paid on the total remaining principal.

Step 4: Calculate the value of the installments. Once the interest rate has been calculated, it is necessary to calculate the value of the installments to be paid monthly. This is done by dividing the total loan amount by the number of months that make up the agreed repayment term.

Step 5: Calculate the interest payment. Interest is paid on the total amount owed on the mortgage loan. This is calculated by multiplying the agreed interest rate by the value of the installments.

Step 6: Calculate the total payment. Finally, the total loan payment is calculated by adding the value of the installments and the interest payment. This will represent the total amount you must pay to complete the repayment of the mortgage loan.

Is life insurance required for a mortgage loan and a loan for the purchase of a home?

Yes, life and permanent disability insurance is one of the most common insurances required for a mortgage loan. This is because the insurance covers the balance of the loan in the event of the borrower’s death or total and permanent disability. Mortgage loans come with a series of insurances against theft, fire, earthquake and life insurance that increase the loan guarantee. In addition, housing loans require a down payment of 20% of the value of the home for low-income housing (VIS) and 30% for social housing.

If you want to buy a house, it is important that you know which type of loan best suits your needs. In this guide, we have covered everything you need to know about mortgage and home purchase loans, so you can make the best decision for you.

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