Home Loan and Construction Loan Explained - Don’t Pick the Wrong One
Buying a house is a big decision, and the correct loan option matters. A home loan and construction loan are two different entities, which can confuse individuals at multiple times. If done wrongly, you end up in a financial crisis.
The first decision that is to be made is building vs buying a house, and then comes the hard part of financing those decisions. But don’t worry, we’ll help you through this complexity and make sure you make a firm decision after going through this blog.
This blog will help you understand both so that you can make the right decision.
Table of Contents
What is a Home Loan?
A home loan is a loan that assists you in purchasing a ready-to-move property. A lender gives you a fixed amount, and you repay in the form of monthly EMIs. The rate of interest is lower than a construction loan, and the repayment period is longer.
This loan is usually considered better for individuals who have a regular flow of income and can manage their finances while paying the EMIs to the banks.
Home loans are suitable for people who want a house without the inconvenience of construction. Home loans are provided with flexible EMI options by different banks and financial institutions, which are provided for freelancers as well.
What is a Construction Loan?
The main difference between a home loan and construction loan is that the latter one is used to build a house from scratch. The lender does not pay money all at once as the construction process goes on as in the case of a home loan.
After completing the house construction, you may need to rehabilitate it as a home loan so that it is convenient to repay. Construction loans are levied with a higher interest rate, and the tenure is shorter.
Construction loans are best suited for those who want to design their house according to their requirement. However, it is more difficult to take a construction loan because the lenders monitor the project closely and disburse money accordingly.
Home Loan and Construction Loan - Which one is the best for you?
Both loans have their pros and cons. A home loan is easy, has lower interest rates, and ownership on completion immediately. It is better if you want to move into the house in a hurry.
On the other hand, a construction loan is designed flexibly but has a complex approval process and higher cost. With patience, time, and budget, a construction loan can also be a good option. It is your choice and budget that will decide.
What to Consider Before Choosing a Loan
Keeping the complexities aside, there are certain things that can make your decision much clearer. These are some of the points before comparing home loan and construction loan.
1. Interest Rates
Interest rates are the key factor in deciding which loan to borrow. Home loans are low-interest since they are secured by a property that already exists. Construction loans are more expensive since there is a risk element involved. You need to shop around for rates from different lenders and choose the cheapest one.
2. Property Type
While you consider financing your way into your dream house, you must consider the property type that you’re looking for. In conclusion, a home loan would be suitable for purchasing an apartment in a good locality with necessary facilities nearby.
On the other hand, a construction loan would be suitable for those who already have a plot in possession and want to build their own dream house of their own choice.
3. Tax Benefits
Both housing loan and construction finance are tax advantageous. For the housing loan, you can take tax concession on repayment of principal under Section 80C and interest payment under Section 24(b) of the Income Tax Act.
In construction finance, the same advantages are available, but interest payments can be deducted only upon completion of construction. Knowledge of these tax advantages can prove to be helpful in effective financial planning.
4. Repayment Tenures
Home loans have a longer repayment term, generally 15 to 30 years. This permits borrowers to repay smaller EMIs over a longer period. Construction loans have a short repayment term, generally between 5 and 15 years, and is a little tougher to manage for an individual with a tight budget. If you wish to repay fewer EMIs, a home loan would be a good choice.
The Bottom Line
A home loan and a construction loan are for two different purposes. A home loan is ideal for an individual who desires an easy and quick purchase. A construction loan is ideal for an individual who desires to construct their home as per their needs.
Before you apply, verify your financial status and long-term goals. Verify interest rates, type of property, tax saving, and repayment duration. The right loan makes home purchase or construction an effortless experience. Choose the right one!
If you are looking for buying or building a house, then we’re here for you. Geomatrix offers the best properties and construction services in Uttarakhand.
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