Home Loans and Construction Loans may sound alike to most people since they share the common goal of facilitating dream home purchases. However, there is a significant difference between these types of loans, both in terms of their purpose and the terms of the loans. It is crucial to understand both these types of loans before you proceed with purchasing your house. Let’s check out the difference between Home Loan and Construction Loan.
Home Loan meaning
Home Loans, offered by banks and financial institutions, empower borrowers by providing funds to facilitate the purchase of their own homes. In the case of Home Loans, disbursing the entire loan amount occurs at once, with instalments commencing immediately thereafter, facilitating the acquisition of ready-to-move-in homes.
What is a Home Construction Loan?
Home Construction Loan, as the name suggests, is extended to the borrowers to finance the construction of their homes. You need to submit your construction plan, proposal and estimated cost to the lender. Home Construction Loans are different from Home Loans in the sense that these are disbursed in instalments as the construction progresses.
Before you apply for a home loan for Self Construction, it is essential to understand the nuances of these loans. Here is how Home Construction Loans work:
- Purpose: Self Construction Loans finance the construction of your new home. When you are planning to construct your home from scratch, you should apply for a Self Construction Loan.
- Loan amount: The disbursement of the loan amount is done in instalments based on the progress of construction.
- Interest rate: Self Construction Loans are secured loans in nature. Therefore, they come with affordable interest rates, just like Home Loans.
- Tax benefits: Home Construction Loans offer the same tax benefits under the income tax law as in the case of Home Loans.
Home Loans vs Home Construction Loans
Following are the major differences between Home Loans and Construction Loans:
- Loan application procedure: The loan application process and disbursement happen in one go for Home Loans, whereas in the case of Home Construction Loans, the disbursement happens in instalments.
- Criteria for eligibility and documentation: The eligibility and documentation are slightly different in both cases. Home Loans require you to submit property documents, whereas, in the case of Home Construction Loans, you need to submit a construction plan, proposal and estimated construction cost.
- The rate of interest: The rate of interest is more or less similar for both Home Loans and Home Construction Loans.
- The loan’s duration: Both Home Loans vs Construction Loans are long-term loans and the tenure can extend up to 15-20 years as well.
Choosing the right loan for you
- Whether it's a Construction Loan vs Mortgage Loans vs Home Loans, choosing the right loan type is important before you buy your home.
- If you are planning to buy a ready-to-move-in home, then you should go for Home Loans. Here, the loan amount will be directly disbursed to the seller of the house. The loan amount here will be disbursed in one go. Your EMIs will start immediately and will include both principal and interest components.
- If you are planning to construct your home, then you should go for Home Construction Loans. Here, the loan amount will be disbursed in instalments as your home construction progresses. The lender will charge the interest component only till the construction is completed. After completing the construction, you will start paying the regular EMI, including both principal and interest components.
- Both Home Loans and Home Construction Loans are long-term and secured loans. Therefore, the interest rate in both these loans is affordable as in the case of any other secured loan.
Also Read: Top 6 factors for selecting the right Home Loan
In a nutshell
Depending on the type of home you plan to purchase, you need to decide whether to opt for a Home Loan vs Construction Loan. Apart from selecting the right loan, you also need to select the right lender. Axis Bank has been the borrower’s choice for faster and more affordable loans. You can get Home Loans or Home Construction Loans at affordable interest rates, quicker financing and flexible terms. Apply for a Home Loan now with Axis Bank!
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
