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Home Loans vs Construction Loans: What’s the Difference?

Housing Finance Know More 03-10-2022 | 5 min read

Banks and financial institutions offer different types of home loans. Depending on the purpose behind the need for capital, the type of loan is determined. For instance, if you would like to purchase a home, a home loan would be recommended. In case you would like to construct your home on a piece of land that you have purchased, it is best to opt for a home construction loan In this article, we will dive deep into home loans and home construction loans. We will also understand the difference between them with a home loan comparison.

What Is a Home Loan?

home loan is essentially an agreement that is made between you and the lender to borrow a certain amount of money to purchase a home. You agree to repay the loan along with interest over a certain period of time that is agreed upon by both you and the lender. You can either opt for a fixed-rate mortgage or an adjustable-rate mortgage depending on what is offered by the lender. With a home loan, you also have the advantage of tax benefits under Section 80C of the Income Tax Act on your principal component. You can also leverage tax benefits on your interest under Section 24(b) of the Income Tax Act.

What Is a Home Construction Loan?

When it comes to a home construction loan, the lender offers to pay for the cost of constructing a new home through a home construction loan. You could either construct your home on a new piece of land or construct a part of your home within your existing property. This home construction loan will be offered at a certain interest rate for a particular period of time. You can choose the tenure of your construction loan depending on your financial repayment capacity. Your loan is secured as there is a mortgage on the property. There are many different types of construction loans such as the following:

  • Construction-to-Permanent Loan: These loans are also referred to as single-close loans. They provide the funds that are required to build your permanent mortgage as well as your dwelling mortgage.
  • Construction-Only Loan: With this loan, you can get the necessary funds to complete building your home.
  • Renovation Loan: If you are planning to upgrade your existing home, you can avail of a renovation loan.
  • Owner-Builder Construction Loan: This loan is a construction-only or a construction-to-permanent loan where the bank also acts in the capacity of the home builder.

Home construction loans, as well, have tax benefits similar to home loans. Under Section 80C and 24(b) of the Income Tax Act, you can avail of benefits on your principal and your interest respectively.

Difference Between Home Loans and Home Construction Loans

When it comes to home loan vs construction loan, there are a few key parameters that vary. Let us have a look at the main differences between home loan and construction loan.

1. Term of the Loan:

Construction loans are usually short term loans compared to home loans. The tenure offered for most construction loans is about one year or less.

2. Interest Rate:

Most banks and lending institutions offer a similar rate of interest for both home loans and construction loans. However, since there is more risk involved with construction loans, some banks may charge a higher interest rate.

3. Disbursement:

With construction loans, the loan amount is disbursed in phases as progress is made on the project. The lender keeps a close eye on the progress of the construction in contrast to home loans.

4. Down Payments:

For a home loan, a very low down payment would be required. However, large down payments would be required for construction loans.

In a Nutshell

Home loans and construction loans are availed for different purposes. There are a few key differences between home loans and construction loans such as the interest rate, down payments, disbursement, and tenure. If you are looking for a home loan or a construction loan, Piramal Finance can be your best choice.

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