Did you know that a home loan and mortgage aren’t the same thing? Though often used as interchangeable terms, the two actually work together to finance a home. Many first-time buyers are unaware of this before entering the process. Knowing the difference ahead of time can help you to have a better understanding of the home buying process.
A home loan is the actual money that is taken out to buy a new home. Home loans typically are only used for residential properties and can be received through a financing company. There are different types of home loans and they can have either an adjustable or fixed interest rate.
A mortgage is all about legality. It is the legal documents that you sign that indicates how you will repay that home loan. A mortgage is a legal verification of your obligation to pay back your home loan in full to your lender. Your new home is the collateral and can therefore be repossessed by your lender when payments are not made. Because of this, a mortgage will always mean the same thing. While that is the case for mortgages, there are several different types of home loans. Here are those types:
Conforming loans will either be lower than or equal to the loan limit set. These loans conform to the basic standards of Freddie Mac or Fannie Mae.
Jumbo loans are usually only used to purchase high end real estate and exceed basic loan limits. These loans do not conform the basic standards.
Backed by the federal government, the guidelines for these loans are often quite strict. They can be harder to obtain but usually have lower interest rates.
Backed by mortgage companies, conventional loans are what most think of when they hear about home loans. These loans usually have higher interest rates to make up for the risk taken by lenders.