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Mortgages Vs. Equity: Quick Guide To Understanding The Difference

  • Written by Ariana Mortenson

Investing our money is a priority to generate a passive income. Also, avoiding the money not used starts losing its value. Investing in real estate has become one of the most popular methods of investment capital that will give your good revenues. But, if it’s the first time that you’re going to buy an investment property, then you should have tons of questions about it. Do not panic; there are a lot of people that have expertise in the field and can help you out with your queries.

Today, we are going to discuss mortgages and equity to purchase a property. After reading this article, you’ll know which one will be the best for you. So, get comfy and prepare to learn more about mortgages and equity, we can assure you this quick guide will be extremely useful.

Choosing the Right Investment Property:

Before thinking about how you’ll purchase the perfect property, make sure you’re choosing the right house to invest in. For instance, there are signs of a good long-term investment property. So, make a checklist and see if the house that you have on sight is going to be a nice acquisition. If you see that the property doesn’t meet almost every point, then check other options.

The signs of a good investment property are:

  • Schools and parks nearby.

  • Easy access to public transportation or main avenues.

  • Amenities close to the property.

  • Development of the neighbourhood.

Mortgage Vs. Equity:

  • Mortgage

We can bet that you have heard about mortgages more than once. It’s one of the most popular methods to get the capital to purchase a property. If you’re not that familiar with mortgages, then pay attention to the next lines. A mortgage is a money-borrowing method that uses your home as a guarantee. Therefore, if you stop paying it, the lender (commonly a financial institution) can seize your property.

To understand it better, when you ask for a mortgage from the bank or credit union, it will lend you money to purchase the residence that you want, taking the property as collateral. The financial institution will lend you up to 80% of the appraised value of the property or its purchase price. So, let’s say that the property you want is appraised in $250,000, you’ll be eligible for a mortgage of $200,000. With that in mind, the down payment that you as a borrower will have to do is $50,000.

Something important to check whenever asking for a mortgage is the interest rate. If a buyer is looking to get a property in London, then they should consider the rising interest rates in UK mortgage – this will also apply to whichever city or country you plan to reside in.

These rates can be fixed or variable. There are mortgage calculators that can help you calculate your mortgage monthly payment. Also, an expert in real estate can help you to get the best mortgage for you, considering your income and how much you can pay month by month.

  • Equity

Now, let’s talk about equity. Like the mortgage, it’s also a borrowing money method that will pledge your property as collateral. The main difference between a mortgage and equity is that you can only ask for the home equity loan after buying a property and accumulating equity on it. So, to be eligible for an equity loan you need to have a property in the first place. Mortgages are commonly the type of loan to purchase the first property, and the equity can be useful to buy a second one.

So, your equity loan will be guaranteed by your equity in the house. To be clearer on it, let's put it in an example. Imagine that you have already purchased a property valued at $250,000, and you still owe $150,000, hence, your equity would be $100,000. So, if you qualify and have a good credit history, then you can take out another loan using the equity as a guarantee.

To know more about this, you will have to take professional advice from a financial institution or other lenders. Standards will vary from lender to lender, and the fixed term on which the loan would be repaid can be different too.

Conclusion:

Now you are aware of the main difference between a mortgage and an equity loan. As you see, it is not rocket science to know how to use equity to purchase an investment property. It can be a very good option to finance the purchase of that property that will give your revenues. Remember that if money is not being invested, it will start losing its value due to annual inflation. So, don’t hesitate and start investing in real estate.

Author Bio:

Hello everyone, I am Ariana Mortenson, a professional writer and blogger. I write on various niches in a way that it’s understandable and appealing to the people. I aim to achieve a difference through my writing which allows you to make informed and valuable choices. Follow me back on Twitter, LinkedIn and Pinterest

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