What is a Home Loans

Home loan is a loan provided by a financial institution to finance the purchase/construction/renovation of a residential property. It is a much sought-after product for Indians today when it comes to owning a house. Earlier there was very little borrowing and people generally tried to avoid creating debt. Now with the situation having undergone a complete transformation, borrowing to create an asset is not only common but in many situations makes good economic sense too. A house is generally considered to be an appreciating asset. This is because the price of the house is expected to rise over a period of time. This makes financing of such a purchase by borrowing a good way to own and create an asset without having all the funds for the purpose. Financial planners will always advise against taking a loan for undertaking expenditure but encourage borrowing for buying a house.

The prices of houses in India have shot up quite significantly. This makes a full payment for a house from the existing savings a very difficult task for most Indians, creating the need for housing loans. There has been a sharp jump in the earnings for many people but this does not cut the requirement for a loan to purchase a house. A person who is earning Rs 5 lakh a year will aspire to own a house that is costing Rs 15-20 lakh while someone with a pay packet of Rs 20 lakh a year would like to own a bigger house in a better locality that can easily cost between Rs 75-80 lakh. The ability to repay the loan over a long time period also makes the entire borrowing affordable for the individual because it fits the monthly outgo within his/her income.

Here are some advantages of a home loan:

• With real estate prices skyrocketing in most Indian cities, it is not always possible for the average person to purchase a home out of his/her savings. In such a scenario, a home loan is an attractive option for financing the purchase of your dream house.
• If you don’t own a house, you are probably residing in a rented property. So instead of paying a monthly rent to stay in a rented house, you might consider paying a home loan EMI (Equated Monthly Installment) and stay in your own house.
• You can also avail of tax benefits on the principal and interest amounts paid by you towards your home loan. This benefit would be in addition to any HRA tax benefit that you might be deriving.

Typical features of a home loan are:

• Home loans are typically long-term loans, with repayment periods up to 20 years.
• The house financed is mortgaged with the bank providing the loan.
• They have lower interest rates compared to most other loans.
• You get tax benefits on loan repayment.
• There is an option of Fixed and Floating interest rates.