Owning a house is one of the significant milestones, and for many people it forms part of taking a loan on a house to make the dream come alive. From buying a ready-built home to acquiring a plot or constructing a house, knowledge of the various types of loan options would help you make the best decision with respect to your finances. This article dissects the essentials of house loans, and one such case in specific is a home loan that was taken for purchasing plot and house construction.
What Is A House Loan?
A house loan refers to a secured type of loan that banks or financial institutions advance towards a home purchase, construction, and renovation. In this regard, the property is considered security; therefore, in case repayments are not made as agreed, the lender has the right to repossess the said property.
Types of House Loans:
- Home Purchase Loan: Acquired for the purchase of an already-ready or under-construction property.
- Home loan for plot purchase and construction: For a person who wants to buy a plot of land and subsequently build a house.
- Home improvement loan: A loan to enhance a present property by renovation or upscale it.
- Composite loan: The plot purchase and construction cost together get clubbed into one loan structure.
- Balance transfer loan: Avail the existing loan taken from one lender to another lender that is offering better terms. It is suitable for those interested in buying a plot and then constructing a house according to their tastes. The product merges the benefits of a plot loan and construction loan all-in-one.
Key Features:
Two-Stage Disbursement:
- Stage 1: Disbursement for plot purchase.
- Stage 2: The disbursement for construction usually happens in stages depending on the progress of the construction.
Eligibility Criteria:
The scheme must be within the municipal or development authority limits.
The construction generally needs to start within a time frame that could be two years.
Loan-to-Value Ratio (LTV):
The lenders finance 70%-90% of the total cost of the plot and construction.
Tenure
The loan tenure goes up to 15-20 years; this depends on the lenders and the eligibility of the borrower.
Why Choose a House Loan?
Benefits:
- Affordable Financing: Loans are spread over several years, making homeownership financially sound.
- Tax Benefits: Both principal and interest can be claimed as deductions, lowering the cost of borrowing overall.
- Appreciation in Value: Real estates form an appreciating asset in the long run, making it a good investment tool.
- Flexibility: Loans for readymade buildings and self-construction can be availed according to one’s requirement.
Downsides:
- Long-term Liability: Home loans are typically long-term liabilities which require regular monthly installments.
- Interest Costs: Increases the cost of the property to significant levels over time.
- Eligibility Factors: Income, credit score, and employment stability determine the eligibility for availing of the loan as well as terms
How to Apply for a House Loan
Analyze Your Needs:
Determine whether you need a home purchase loan, plot purchase and construction loan, or something else.
Check Eligibility:
A lender will weigh your creditworthiness depending on income, credit score, and other existing financial liabilities.
Compare Lenders:
Compare interest rates, tenure options and processing fees offered by lenders.
Gather Documents:
Essentially, these are:
- Identity proof (Aadhaar, Passport, PAN card).
- Income proof (salary slips, tax returns).
- Property documents (sale deed, building plan).
Apply
- Fill-up the application online or at a branch of the lender.
- Loan Sanction and Disbursal
- After verifying all the documents and property information, the lender sanctions the loan. The release depends upon the type of loan, wherein fully payment is made for ready-built houses and then periodically for construction loans.
Things to Consider Before Taking a Loan
1. Your Budget:
Study your financial status and devise a realistic budget. Remember all other expenses such as stamp duty, registration, and lawyer fees.
2. Type of Interest Rate:
Fixed Rate: Does not change throughout the period of the loan.
Floating Rate: As on the market
3. Loan Tenure:
Low monthly EMI’s as an alternative pay out option though boosts the overall interest pay out. Choose the tenure that suits and balances the overall repayment.
4. Prepayment Options:
Some lenders do not charge the penalty for prepayment or foreclosure of the loan. This further saves on the interest pay out.
5. Construction Timeline:
For plot purchase and construction loan, ensure you can start construction as per the lender within the stipulated time to avoid any penalty.
Tax Benefits on House Loans
The house loan attracts several tax benefits under the Income Tax Act, as follows:
Principal Repayment:
Deduction up to ₹1.5 lakh under Section 80C.
Interest Payment:
Deduction up to ₹2 lakh under Section 24(b) for self-occupied properties
Together for Plot and Construction:
Benefits are permissible only after the construction is over.
Tips to Manage Your Home Loan
Utilize an EMI Calculator:
Calculating an EMI beforehand gives an idea of the month commitments and these are in fact bound within one’s pocket range.
Maintain a Good Credit Score:
Having a good credit score over 750 puts at a good position and readily gets better deals for loans.
Don’t Over-Borrow:
Only borrow what you want to and can repay.
Plan for Pre-Payments:
Save towards partial prepayments from time to time in order to lighten up the burden of loans.
Emergency Fund:
Maintain a reserve to cover EMIs in case of unexpected financial difficulties.
Alternatives to House Loans:
If a house loan doesn’t align with your financial goals, consider these alternatives:
Saving for a Larger Down Payment:
Reducing the loan amount can lower your EMIs and interest costs.
Joint Loans:
Co-borrowing with a spouse or family member would increase the loan eligibility amount and share repayment responsibilities.
Leasing or Renting:
If the purchase is not in the immediate future, then you can make use of the rented or leased establishments that can come in handy while you save for a future purchase.
Conclusion
A house loan is a good financial tool that leads to someone becoming an owner of a house, either as a purchase of a ready-built house or for other purposes like pursuing a home loan for plot purchase and construction. Understanding the different loans, their benefits, and their requirements will help make informed decisions which are in your best interests.
Therefore, ensure to evaluate your lenders, assess repayment capacity, and be conscious of the terms and conditions for a smooth borrowing experience. Being careful and prudent in planning and managing will make your road to homeownership rewarding.