Buying your own home is every person’s dream. One major hurdle in this dream is finance. But there is nothing to worry about as these days one can get a loan to buy the dream house. Now here you will have two options. One is a home loan, and the second is a home construction loan. Home construction loans and home loans may sound similar, but they are not the same.
A home construction loan is one that you take for a property that is under construction. A home loan is one that you take for a house that is already constructed.
Look at the major differences between home loan and home construction loan:
The difference in the tenure:
If you compare the tenure of the two, you will find that the tenure of the home construction loan is less as compared to the Home loan brokers. The EMI of the home construction loan will also be higher. Keep in mind that here the lender is taking a higher risk of giving you a loan for a home that still has to be built.
The difference in the disbursement:
A home loan is disbursed completely in one go. But the home construction loan will be disbursed in phases. The payment for the next phase of construction will be given only when the previous phase is complete.
The difference in the down payment:
For a home loan, the down payment is around 10 to 20% of the property value. But for the home construction loan, the down payment will be higher. It can be in the range of 25% or more of the property value.
The difference in the interest rates:
The interest rates for a home construction loan will be higher as compared to the interest rates of home loans.
The tax exemption factor:
In both cases, tax exemption is possible, but the applicable conditions are different. One cannot take advantage of the tax exemption factor in the case of home construction loan if the construction of the house is not completed in 5 years or if one sells the house in 5 years. Claiming of the tax return has to be done in 5 equal parts. These conditions are not applicable in the case of a home loan.
Regarding the pre-payment penalty:
In the case of a home loan, if you pre-pay before 18 months, then the pre-payment penalty is applicable. But in the case of home construction loans, there are chances that the lender may not impose the pre-payment penalty. But this may vary from lender to lender.
Which type of loan should you choose?
Builders will have to choose home construction loans. People who have plans to build their own houses can also choose a home construction loan. But keep in mind that as compared to the normal home loan, the terms and conditions of the home construction loan are a bit complicated.
Therefore, if you have plans to apply for a home construction loan, then make sure that you have the complete plan ready so that you make no mistakes.