One of the many dreams and aspirations of any individual or family is to have their own home. And one such way to fulfill this dream is to apply for a loan so that you can buy your home. But did you know that you actually have two options for home financing if you’re planning to own a home?

The first is the more common home loan, where the lender bank provides the loan amount on a pre-built, existing house. The second one, called a home construction loan, is a type of loan provided by the lender for the construction of the house, even before it is built.

Read on to know more about the differences between these type of loans and which one will best meet your needs.

Home Loan: A type of loan where the entire loan amount is disbursed to the borrower at once, who then buys an existing house and starts paying the EMIs for a tenure of 20 to 30 years.

Home construction loan: A type of loan where the loan amount is disbursed in phases, for the construction of the house.

Differences: Home loan vs construction loan

Tenure of a construction loan is shorter

The tenure period of a home construction loan is much shorter that a regular home loan, resulting in higher EMIs. This is so because the lender is at a greater risk to provide funding for a house that does not yet exist.

The home construction loan amount is disbursed in phases

Unlike a regular home loan amount, which is disbursed in its entirety to the borrower, a home construction loan is paid out in phases. The lender keeps an eye on the construction and pays for the next phase only after the previous construction phase is complete.

A construction loan has a larger down payment.

Where a regular home loan has a down payment of 15% to 20%, the down payment of a home construction loan can be 25% and above.

Interest rates

Generally, interest rates for home construction loans are higher at about 11 to 14 percent, as opposed to 8 to 10 percent for regular home loans. You can easily find out these details by using a home loan calculator available on various websites.

Final Word

Thus, a home loan and a home construction loan have their own advantages and disadvantages. A home loan can be more economical and hassle-free, but you would have to choose from existing or pre-built houses.
A home construction loan is advantageous in this regard. You can make your house the exact way you want in exchange for higher interest, a shorter tenure, and a detailed architect and construction plan for your dream house that the lender has to approve.

Learn more about our plot and home construction loans.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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