How Do an Equity Loan and a Conventional Loan Compare?

A conventional loan is any primary mortgage not insured by the federal government. If you have a private mortgage lender providing your primary loan, then you have a conventional loan arrangement. An equity loan, on the other hand, is a secondary loan taken out against your property once you have secured at least partial ownership of it.

Home equity loans are subordinate to conventional loans. This means, if you go bankrupt or have your home foreclosed on, the conventional lender will take priority of the property and regain funds faster than the equity lender. A subordinate lender does not actually hold the deed to the home, while a primary lender does. In order for an equity lender to foreclose on your home, the lender would have to purchase the deed from your conventional mortgage holder.

Home equity loans are more expensive than conventional loans. When the home equity lender takes a second seat to the conventional lender, the home equity lender is assuming a much greater risk in extending you funding. As a result, the lender will assume a higher interest rate on the loan. You will owe a higher interest rate to the home equity lender than you will to the conventional lender even though the home equity loan is typically smaller.

What is a conventional loan?

A conventional loan is any mortgage that is not attached to federal support through the various programs supplied by the Department of Veterans Affairs, Farm Service Agency or Department of Housing and Urban Development. These programs, such as Federal Housing Administration insurance, make a loan non-conventional by tying it to external factors. With a conventional loan, the factors involved in the cost of financing are directly related to the borrower's personal financial profile. The borrower's credit, income and ability to secure private insurance will be considered in order to determine the terms of the loan.  

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