Manage Money

Construction Loan vs Home Loan

Everyone desires to own a home at some point of their life. Owning a home, compared to renting one, gives you so much more freedom. Now, one way to fulfil your dream to buy and own a home is to get a home loan, unless you have tons of money lying around! 

Now, if you are looking for a loan, there are two options for you contrary to what most believe. Your options are Home Loan and Construction Loan. Now, these are loans for different requirements, and it is important that you know their similarities and differences. 

The only similarity is that both of these can be used for buying a home. But that’s where the similarities stop and the differences start. 

Differences between Home Loan and Construction loan

Tenure of a construction loan is much shorter- When compared to a home loan, the tenure of a construction loan is much shorter. In some ways it is good since with a shorter repayment period you’ll save money in the long run. However, your EMI’s per month shall be higher in comparison. A higher EMI is there in order to offset the risk of your lender.

Home construction loan amount is given to you in phases

In a home loan, you get all the amount in a lump sum, right? Well, in the case of a construction loan, it’s not like that. Here the loan amount is disbursed over to you in phases. This is to coincide with the various phases of construction.

Construction loans are disbursed in phases, which coincides with the various phases of construction.

In a way, it is a good plan. Construction happens in phases, and since you are getting your money in phases, you won’t be wasting the funds. In phases, you’ll be getting just what you need and applied for. 

Construction loans have large down payments

In case of home loan, the down payment is 15% to 20% of the loan amount. Think that is a lot of money? Well, construction loans have 25% down payment. That is a pretty hefty amount of money as down payment, but if you are sure you want this type of loan, and if you have the funds, go for it.

Interest rates

Home construction interest rates are higher too. These are generally between 11% and 14%. In home loans, interest rates are between 8% and 10%. 

To conclude…

Both these types of loans have their own pros and cons. A home loan is certainly more economic and is hassle-free in comparison, but then you can’t have much choice in choosing homes.

A home construction loan gives you more freedom to say where you want to have your home and determine its construction cost. It has shorter tenure, higher interest, etc, and you’ll need a detailed construction plan and architect plan in order to get this loan.

 

Rate this article: