Home Finance Understanding the Basics of a Home Loan

Understanding the Basics of a Home Loan

by Clare Louise

Many people in India tend to struggle with their home loan application, mainly because they don’t understand the basics. Read on to know more about the fundamentals of home loan.

Availing a home loan is a big financial decision that you make in your life. It is paramount that you do your research well about it and proceed slowly with every step. If you are a first-time loan applicant, you must invest your time understanding the basics of a home loan. This will help you understand the intricacies of the loan and help you make an informed borrowing decision.

What is a home loan?

A home loan is essentially a credit that you can obtain from a financial institution like a bank or an NBFC (non-banking financial company) to buy a new house, construct a home or renovate your existing residential property. You can avail of the credit with any lender of your choice and then repay it in smaller instalments known as EMIs (Equated Monthly Instalments) over a specific period as per the loan terms. Generally, most lenders in India provide home loans for a maximum of 30 years.

Types of home loans available in India

  • Home Purchase Loan

This is one of the most common types of home loans availed in India. As the name suggests, home purchase loans are used to buy a residential property from either the builder or a seller. Typically, the lenders in India finance up to 80% of the property’s market value as a loan.

  • Home construction loan

Money people like to construct their homes, and they approach the lender for credit to fund the construction cost. Unlike the home purchase loan, the lenders disburse the approved amount in phases as you complete the construction.

  • Home extension loan

If you want to extend your bedroom or build a new room to welcome your newborn, you can avail the home extension loan. Most lenders in India include this as part of the home-improvement loan. It is an excellent way to get the necessary funds for the renovation work as the interest rate for a home extension loan is much affordable than a personal loan.

  • NRI Home Loans

As the name suggests, NRI home loans are specially meant for non-resident Indians interested in buying a property in India. Although the NRI home loan structure is pretty similar to the loan for Indian citizens, it usually involves exhaustive paperwork.

Types of Home Loan Interest Rate

When you apply for a home loan, the interest rate is one of the critical factors you must consider as it has a direct impact on affordability. In India, most lenders give the loan applicants the flexibility to choose the interest type; you can choose between a fixed internet home loan or a flexible interest home loan.

If you opt for a fixed rate home loan, the interest rate will remain the same throughout the loan term. Generally, the fixed-rate interest home loans tend to be costlier than the flexible rate home loan in the long-run.

If you opt for a flexible interest home loan, the interest fluctuates over the loan term based on the prevailing market condition, government measures, and RBI rules changes. Generally, experts recommend choosing a home loan with a flexible interest rate as it is much cheaper than the fixed interest rate home loan in the long-run.

What is Down Payment?

When you apply for a home loan, you will invariably hear about the term ‘down payment’. Generally, the lenders in India approve a maximum of 80% of the property’s value as a home loan, and you must pay the remaining amount from your pocket upfront. This amount is called a down payment. So, you should make arrangements to pay the down payment to avoid any delay in the loan sanction process.

Now that you know a few fundamental home loan-related concepts, make sure that you do your research well about the lenders and choose the one that offers you the best deal with favourable terms.