Buying a home is one of the biggest financial goals for most people in India. A Home Loan is a secured loan offered by banks, housing finance companies or NBFCs to purchase, construct, renovate or expand a residential property. Banks or housing companies offer different types of loans to suit your needs with flexible EMI options or competitive interest rates. Here, we will understand the Meaning, Types, and Benefits of a Home Loan in simple and clear language.
Types of Home Loan
There are different types of loans available depending on the needs of the individual. Below are the main types explained in simple words:
Home Purchase Loan
Home Purchase Loan is taken to buy a new or resale house. It is used to buy a new or resale house, flat or apartment. In this, the Bank or Finance Company gives you a loan of up to 80-90% of the value of your property and you have to make the remaining down payment yourself. Then you pay monthly EMIs and on completion of the loan, you get the ownership rights.
Home Construction Loan
Home Construction Loan is a loan that you take to build a house on your land or plot. In this, you do not get the entire money at one go, rather banks or financial companies give you the money at different stages according to the construction progress. You have to provide the documents, architect plan and cost details of your plot. In this, interest is charged only on the money taken till now and EMI starts after getting the entire loan amount.
Home Renovation Loan
A Home Renovation Loan is a loan taken to repair or renovate your old home. It is used for painting, flooring, electrical work, kitchen or bathroom renovation, or remodeling. You need to submit your home documents along with a renovation plan, after which repayment is made through EMIs.
Home Extension Loan
A Home Extension Loan is a loan taken to increase the size of an existing home, such as adding a new room, building another floor, expanding the kitchen, or extending a balcony. This is helpful when your family grows or you need more space. For this, you’ll need to submit an extension plan and an engineer’s report along with your home documents.
Plot or Land Purchase Loan
A Plot or Land Purchase Loan is a loan taken to purchase a residential plot or land. This loan is not for the farm land itself, but only for residential plots that you can later build on or keep as an investment. The loan amount depends on the location and price of the plot. After approval, the loan amount goes directly to the seller.
Balance Transfer Loan
A Balance Transfer Loan simply means transferring your existing home loan to another bank or financial company. Simply put, if you already have a home loan and are receiving a lower interest rate from another bank or financial company, you can transfer it there. The new bank pays off the outstanding balance from the old bank, and you pay the EMIs with the new bank. Sometimes, some additional charges may apply.
Home Loan for NRIs
This is a loan taken by Indians living abroad. It is used to purchase, build, or expand property in India. It is also available to those with PIO or OCI cards. Property documents, along with Passports, Visa, Work Permits and Income Proof, must be submitted. Payment is usually made through NRE or NRO banks.
Bridge Loans
A Bridge Loan is a short-term loan taken out when you want to buy a new home and your old one hasn’t sold yet. It’s a bridge between the two homes, helping you secure the money for a while until you receive the payment for the sale of your old property. The loan is repaid after the sale of the old home. The term is generally 6-12 months, and the interest is slightly higher.
Benefits/Advantages of Home Loan
A Home Loan offers several advantages that make it superior to cash payments. It not only fulfills the dream of owning a home but also provides both financial and long-term benefits. Its main benefits are as follows:
- Helps you own a Home – Most people are unable to pay the entire amount at once. This Loan helps you buy a home easily. It gives you the option to pay in monthly EMIs.
- Build your assets – Buying a home on loan not only creates debt but is also a smart way to increase your wealth. You invest in property, which increases its value over time.
- Lower Interest Rates –Home Loans offer lower interest rates than personal loans or credit cards. They typically cost 8-10%, making them affordable.
- Long Time Repayment Tenure – In this, you get more time to repay the loan (Usually up to 20 to 30 years) as compared to other loans. This helps in reducing monthly EMI and makes repayment more comfortable. You can calculate your monthly EMI easily using our EMI Calculator before applying.
- Tax Benefits –Home Loans offer interest (up to ₹2 lakh/year) deductions under Section 24(b) of the Income Tax Act and principal (up to ₹1,50,000/year) deductions under Section 80C. First-time homebuyers can also claim an exemption of up to ₹50,000 under Section 80EE.
- Improves Credit Score – It also helps in improving your Credit Score. If you pay EMI on time, your Credit Score improves which helps you in getting loan easily and at cheaper interest rate in future.
- Balance Transfer Facility – If you are getting a loan from any other Bank or Financial Company with a good offer or low rate of interest, then you can avail its benefit by transferring your loan to another Bank or Financial Company through balance transfer facility.
- Due Diligence – Due diligence means thoroughly examining every document, property, and legal matter. Before granting a loan, Banks thoroughly examine property documents, ownership details, and legal regulations, greatly reducing the risk of fraud or legal risks.