One can achieve one’s home of dreams in many different ways. Some of us like to own a readymade house whereas some others like to see their home being built exactly the way they planned it to be. It is your choice whether you would like to invest your time or energy to craft the home of your dreams or would you like to avoid the hassles of home construction; eitherway the financing options are never limited. Bank loans are easily available for both kinds of home purchasing.
Financing is the first concern of all kind of home buying. When you apply for a loan for an under construction property, it is called a ‘home construction loan‘. Whereas when a loan for buying a fully constructed house is availed, it is called a ‘home loan‘.
A home loan and a home construction loan appear similar and many of the borrowers are found to be getting confused with these two credit products. Though both of these products are meant to be home buying only, there are some differences that distinguish both the products. Here are the vital differences between a home loan and a home construction loan.
Construction Loans Are Shorter In Tenure
A home loan is a kind of credit which can run for as long as 30 years. But when it comes to a construction loan, one cannot enjoy such a long tenure. The tenure of a construction loan is always shorter which result in a higher amount of EMI. The risk factor is always high for the lender in a construction loan than a general home loan. Moreover, for availing a construction loan, you will need to produce detailed plans, a construction timetable and a budget that makes business sense.
Home Construction Loans Are Disbursed In Phrase
A home loan on under construction property loan is not disbursed at once. The loan amount is disbursed as progress is made on the project. The whole loan amount is broken down into phases. The lender keeps a sharp eye on the progress of the project and a phase of the loan will be disbursed only after the previous phase is successfully completed within the given time. But if you avail a standard home loan, the whole amount is disbursed at once.
The Tax Exemption Conditions Are Different
A home loan and an under construction home loan both can claim tax benefits but the claiming process is not similar. the tax benefit for under construction home loan cannot be claimed if the construction is not completed within 5 years or the house is sold within 5 years. Moreover, the tax return should be claimed in five equal parts. If you take a general home loan, all these conditions will not be applicable.
Larger Down Payment
A general home loan down payment is 10% to 20% of the property value. Rest of the amount can be availed through home loans. But to qualify for a home construction loan, one must pay more than 25% of the property value as down payment.
The Rates
One will always find a difference in home loan interest rate and home construction loans interest rate. The rate of interest on home loans is generally in the range 8.55- 12 per cent. But a Home construction loan is always costlier than a general home loan. The rates of a home construction loan ranges somewhere between 11-14 per cent. The interest rate can vary depending on the lender and the property for which the loan has been taken.
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Zero Cost In Prepayment
Most of the lenders of home construction loans offers zero pre-payment charges even if it is an early period of the tenure. But if you want to pre-pay your home loan in an early period i.e. before completion of first 18 months, you will have to pay a pre-payment penalty.
Construction loans are a must for the builders who work with huge projects. But individuals who want to build their homes according to their own way can also avail the same. But as mentioned above, availing a home construction loan is a bit tricky as you will need to produce a full proof plan for your home construction and must complete the construction within the pre-fixed time so that the disbursals are done at the right time. Before you reach any lender for a construction loan, you must be equipped with a realistic architect plan and an adequate amount for the downpayment of the property.
