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What are home loans and how do they work?

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Created on
January 16, 2023

Summary

What’s Inside

If you are keen on purchasing or constructing a home of your own but are currently low on funds, applying for a home loan can work out just fine for you.

What are home loans?

Home loan refers to a financial product that enables individuals to purchase a home by borrowing money from a lender, and understanding how home loans work is crucial for making informed borrowing decisions.

These loans are secured borrowings, where the property for which the loan is availed itself acts as the collateral and offers a greater degree of security to the lender. Also known as housing loans, these financing products make it possible for the borrower to own a house property without tapping into their savings or breaking their investments. 

How do home loans work? 

If you are planning to buy or build a house, you need to approach a lender and check if you qualify for their home loan offerings. In case you do, you need to submit an application, which will then be reviewed and approved (provided you qualify for the loan).

As for the repayment, you will have to repay the principal as well as the interest charged thereon in equated monthly installments (EMIs) as per the repayment schedule provided by the lender. For ready-to-move houses, the repayment typically starts almost immediately (or a month or two) after the loan amount is disbursed. However, for house properties under construction, banks may offer a moratorium period after which repayment of EMIs begins. 

Now that we have established what home loans are and how they work for consumers, let us understand what the interest rate on home loans is like.

What is the interest rate on home loans?

The home loan interest rates start from 8.40% p.a. and go upwards of 13-14% p.a.

The different types of home loans in India

There are different kinds of home loans available for borrowers in India. Here is a preview of some of the most common types of home loans you can avail, and what they can each be useful for. 

a. Home loan for the purchase of land

These loans are available to borrowers who wish to purchase land to construct their own homes. The plot of land purchased with the funds borrowed should be residential in nature and not commercial. 

b. Home purchase loan

These home loans are disbursed to borrowers who wish to purchase existing, ready-to-move-in homes. These homes can either be new properties or resale properties. The key criteria is that they should already be built. 

c. Home construction loan

In case you wish to construct your own house property, this kind of loan is the ideal choice. The funds you borrow via a home construction loan are to be used solely for the construction of a house. This kind of loan may often be clubbed with a land purchase loan. 

d. Home extension loan

If you already own a house and wish to extend or expand it — perhaps by building a new floor — this is the kind of loan for you. Home extension loans are offered for expanding an existing house. 

e. Home improvement loan

Also known as home renovation loans, these home loans are disbursed to borrowers who wish to renovate or improve their existing house properties. 

What is the home loan processing time?

The home loan processing time can range from a few weeks to several months, depending on the lender, documentation, and your credit history.

Conclusion

Loans can be a tricky business if you aren’t well researched before you start the process. The good thing is that both loans, and info about them is easily accessible online today. 

If you’re thinking about taking out instant loans, you don’t have to look too far. You can get an instant loan directly to your Savings Account through the Fi Money app. These are pre-approved personal loans made available to select users with good credit scores. If you want to know more, check out Fi

Frequently Asked Questions

1. How do home loans work?

When you apply for a housing loan online or offline, the lender checks your eligibility and if approved, disburses funds to your account. These funds can be used to buy an existing house property, construct a new house or rebuild your current house. The funds cannot be used for any other purpose. In case of any default in the repayment of the loan, the lender will sell the property to recover the funds. 

2. How do I qualify for a home loan?

To qualify for a home loan, you need to meet the eligibility criteria set by the lender. The eligibility criteria typically revolve around the age, the income, the employment status and the credit score of the applicant. 

3. How does a mortgage loan work?

A mortgage loan is simply a loan against property. Here, you pledge your property and then avail a loan against it. The funds borrowed can be used to meet a variety of financial requirements like financing a wedding or paying for a surgery. The property is used as collateral, and the lender can sell it to recover the dues in case of any default from your side. 

4. What’s the difference between a home loan and a mortgage?

In a home loan, the house that you wish to purchase or build is used as collateral for the loan. In a mortgage loan, however, you already own the house and offer it as collateral to borrow funds that can be used for various purposes like paying for medical emergencies or funding your education or a wedding. The difference, primarily, lies in how the funds borrowed can be used. 

5. Why is it called a mortgage?

The word ‘mortgage’ is derived from the French phrase Mort Gaige, which literally translates to death pledge. This term is used because when the principal is paid, the debt instrument dies or is no longer valid. 

6. What is difference between home loan and house loan?

In general, the terms "home loan" and "house loan" are often used interchangeably to refer to a loan taken out to purchase a residential property. However, there may be some subtle differences in how the terms are used depending on the lender or context.

7. Is there any benefit of home loan?

Home loans have several benefits. They allow individuals to purchase a home without having to pay the full cost upfront, enabling them to own a home and build equity over time. Borrowers can avail tax benefits on the interest paid on their home loan and on the principal repayment, which is advantageous. Home loans also come with flexible repayment options that can be customized to fit the borrower's financial situation.

8. How does the home loan interest works?

Home loan interest is the cost charged by the lender for providing the funds to purchase a home. The interest rate is typically expressed as a percentage of the total loan amount and is calculated annually. Home loan interest can be either fixed or variable.

9. How is EMI calculated on housing loan?

EMI or Equated Monthly Instalment is the amount a borrower pays every month to the lender to repay a housing loan. It consists of both the principal and the interest component. The EMI calculation is based on the loan amount, interest rate, and tenure.

The formula used to calculate EMI is:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

Here, P is the loan amount, R is the monthly interest rate, and N is the loan tenure in months.

Disclaimer

Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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