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Definition of 'Home Loan' A sum of money borrowed from a financial institution or bank to purchase a house. Home loans consist of an adjustable or fixed interest rate and payment terms.
Home loans, also known as mortgages, use the borrower's home for collateral. This home can be a single-family house up to a four-unit property, as well as a condominium or cooperative unit. Lenders fund home loans, but both the lenders themselves and brokers who act on behalf of the lenders originate, or process, them.
The ownership of a house is one of the key signs of success among the fast-growing Indian middle class. As the income of the average Indian family increases, there has been a continuous increase in the desire to own a house and this has lead the price of property to reach unmatched highs in recent years. This is true for not just the big cities but also for smaller cities across India. This unbridled price rise has made it near impossible for the common man to purchase their home through just savings. This is among the major reasons for the home loan business to have witnessed unmatched growth in recent years. So much so that prospective home buyers have multiple options to seek a home loan from banks as well as NBFCs.
Home Loan Characteristics :
Here we have enumerated different features of a home loan to help you understand the home loans in a better way.
1. When granting a home loan, the lender uses your property (home) in order to secure the loan. Due to use of your house as collateral, home loans are secured loans that involve a low level of risk for the lender. If you are unable to pay the loan for any reason, the lender can legally auction off your property to retrieve the outstanding loan amount.
2. Being a secured loan, interest rate of a home loan is comparatively lower than the interest rate of an unsecured loan, such as a personal loan.
3. The amount of the home loan can vary based on your income, credit history, the locality/city you are planning the purchase in and various other factors. You can apply for a home loan jointly with your spouse, family members or others as co-applicants.
4. Home loans usually have longer repayment tenures which range from 5 years to 30 years. The repayment time period for a home loan is fixed at the time you apply for home loan.
5. Prepayment of a home loan can also be done. Some home loan providers charge a prepayment fee if you prepay a loan while some do not. Therefore, home buyers should compare the home loans available to find the best home loan offers.
6. The Equated Monthly Installment (EMI) is the money you pay each month to repay your home loan principal amount and its interest amount. Thus when calculating the Home Loan EMI, both the accrued interest on the loan and the principal amount are taken into account. You can use the home loan EMI calculator to calculate the EMI which you will have to pay for your home loan.
7. Home loan includes a number of associated charges, such as registration charge, processing fee, penalty on prepayment, commitment charge and miscellaneous charges (documentation/consultation).
8. Banks usually maintain a margin of at least 20% when sanctioning a home loan. Thus, the home loan amount provided to you only covers a maximum of 80% of the estimated value of the house being purchased. Additional costs such as down payment, registration costs, etc. have to be borne by you.
9. You can avail tax benefits on your home loan as per provisions of the IT Act, 1961, which are subject to change.
Types of Home Loans :
With people becoming more and more open to home loans, loan providers are coming up with better and more attractive home loans. With a host of cheaper home loans on the offer, it is best to compare home loans first and then make a purchase.
Home loan is a relatively broad category, as it not only includes a bank loan for purchasing a new or existing house. Loan providers are offering Home loans for different purposes according to the changing needs of the customer.
Home loan can be of the following sub-types:
The land purchase loan may be availed in order to complete the purchase of a plot of land for construction or as an investment. Land purchase loans are just like a home loan, the only difference being that this loan is used to purchase a vacant plot. The term, the interest rate and procedure for both home loan and land purchase loan are similar.