Difference Between Home Loan and Home Construction Loan

The ultimate and universal desire of all families in India is to live in their dream home. However, with real-estate prices skyrocketing, it’s nearly impossible for individuals to pay for a residential property out of pocket. Banks and non-banking finance companies offer two types of loan products to help people realize their property dreams: home loans and home construction loans. Both of these loans provide substantial financial assistance to people looking to buy a home.

But what is the major difference between the two loan types? What are the features, eligibility requirements, and loan categories to consider? This article answers all of these questions and more. Let’s get this party started.

Home Loans vs. Construction Loans – A Comparison

Today, it is relatively simple to become a homeowner. Whatever type of home you want to buy, you can get the necessary funds by taking out a home loan. Banks and housing finance companies provide a variety of home loans. Whether you want to buy a ready-to-move-in flat, an under-construction property, build a home on a plot of land, or renovate your current home, you can find the right home loan to meet your needs. Having said that, most borrowers get confused between a home loan and a home construction loan. Although the two appear to be similar, there are several differences that borrowers must consider when selecting the right type of home loan.

Let’s begin by understanding the definitions of the two types of loans

What is Home Loan?

A home loan is essentially an agreement between you and the lender to borrow a specific amount of money in order to purchase a home. You agree to repay the loan plus interest over a set period of time agreed upon by you and the lender. Depending on the lender, you can choose between a fixed-rate mortgage and an adjustable-rate mortgage. A home loan also provides you with tax benefits under Section 80C of the Income Tax Act on your principal component. You can also take advantage of tax breaks on your interest payments under Section 24(b) of the Income Tax Act.

What is Home Construction Loan?

A home construction loan is one in which the lender offers to pay for the cost of constructing a new home. You could either build your home on new land or build a portion of your home on your existing property. This home construction loan will be available at a fixed interest rate for a set period of time. You can customize the term of your construction loan based on your financial ability to repay. Your loan is secured because the property is mortgaged. There are numerous types of construction loans, including the following:

Loan for Construction-to-Permanent

These loans are also known as one-close loans. They provide the funds needed to construct your permanent mortgage as well as your home mortgage.

Loan for Construction Only

You can get the funds you need to finish building your home with this loan.

Loan for Home Improvement

If you want to improve your current home, you can get a renovation loan.

Construction Loan for Homeowners

This is a construction-only or construction-to-permanent loan in which the bank also acts as the home builder.

Home construction loans, like home loans, have tax advantages. You can claim benefits on your principal and interest under Sections 80C and 24(b) of the Income Tax Act, respectively.

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