Has this ever happened to you? You find your dream home, but then feel a little stuck when you see the price. This is where a home loan comes in for many homebuyers.
Before applying for a home loan, it’s important to clearly understand what is home loan and how it works, so you can make a confident and informed decision.
In simple words, a home loan is the money you borrow from a bank to help you buy that perfect place to settle into. Instead of waiting years to save every penny, you can move into your home today and pay back the money in small parts over time.
According to the National Housing Bank’s 2024 report, the individual housing loans in India have hit ₹33.53 lakh crore as of September 2024. This is a 14% jump from the year before, which proves that more people are using loans to purchase their dream home.
If you’re still confused and want complete clarity on what is a home loan, the different types of home loans available, and how they can help you secure your dream home, read this blog till the end.
What is a Home Loan?
A home loan is money you borrow from a bank or lender so that you can buy a house, apartment, or any land. If you are wondering what is home loan, it is simply a financial support system where the bank helps you purchase your home. It is like a bank saying, ‘We trust you that you will pay us back, so here’s the money to purchase your home.’ In return, you agree to pay back the money in small amounts, with some interest on top.
Instead of spending decades trying to save up enough cash, you get to move into your place now and pay for it over time. Each month, you make a payment, people call these EMIs, or Equated Monthly Installments. The home itself is a security for the loan. If you don’t return the money, the bank can take back the property.
So, when you ask, what is home loan, the answer lies in a trustworthy and financial partnership to make your dream of buying a home possible.
How Does a Home Loan Work?
When you apply for a home loan, the bank evaluates your income, CIBIL score, and whether you can handle the repayments. Once approved, they release the loan amount either directly to the seller or builder. Then, starting from the very next month, you begin paying EMIs.
Each EMI has two parts:
1) Principal: The money you took from the bank.
2) Interest: The bank charges for lending you the money.
At first, most of your EMI goes toward interest. As years pass, more of your EMI starts paying off the principal amount. This keeps going until you have paid off the whole thing, which usually takes anywhere from 15 to 30 years.
Benefits of Taking a Home Loan
If you take a home loan, it comes with many advantages, like:
- Own Your Home Immediately: Why do you spend years waiting and saving money, when you can purchase a house right away? With a home loan, you get the space much sooner, and every payment helps you build equity.
- Get Government Perks: The Government Programs like PMAY-Urban 2.0 provide interest subsidies for eligible buyers, so your loan actually costs less, and your monthly EMIs decrease.
- Manageable Payments: Instead of paying a huge lump sum, you can split the cost over several years. That way, owning a home fits into your regular budget.
- Boost Your CIBIL: Every time you pay your EMI on time, your CIBIL score gets a lift, which makes it easier if you want another loan.
- Your Home, Your Investment: Property values usually go up as time passes. So, besides having a place to live, you are putting your money into something likely to grow in value.
Types of Home Loans
There are certain situations where you need different types of home loans. Here are the main options you can explore:
- Home Purchase Loan: This is one of the most common loans. You can apply for this loan when you want to purchase a house or apartment.
- Home Construction Loan: Planning to build your own house on a plot you already own? This loan helps you fund the construction.
- Land Purchase Loan: If you want to buy land, this loan finances the land purchase.
- Home Renovation/ Extension Loan: If you want to add an extra room or floor to your property? This loan helps you extend your existing property.
- Home Loan Balance Transfer: If you already have a home loan but have found a better interest rate somewhere else, then you can transfer your loan to another bank.
The Key Features of a Home Loan
Understanding these features is beneficial before you commit to a loan:
1. Collateral
When you take out a home loan, your property serves as security for the bank. If you don’t return the loan money, the bank can legally claim your house. That’s why home loans often have lower interest rates than personal loans. The bank feels more confident because they have your property as backup.
2. LTV Ratio:
The loan-to-value (LTV) ratio is the percentage of the property’s price that the bank is willing to pay for you. Most banks cover about 75-90% of the total cost, which means you only need to arrange the remaining 20% as your own down payment. So, if you can pay a larger amount, the bank feels more secure and may even offer you a better interest rate on your loan.
3. Repayment Terms
Home loans typically span a long period of time. A longer loan means your monthly payments (EMIs) get smaller, but you will have to pay more in interest overall. If you want to finish sooner, the EMIs go up, but you save on interest.
4. Lower Interest Rates
This is the most common question asked by people: What is home loan interest rate in India? This is the fact that home loans beat personal loans and credit cards when it comes to interest rates.
In India, loan rates start approximately around 7.35% per year and can go up to 13%, depending on the bank, your CIBIL score, or whether you pick a fixed or floating rate.
5. Loan Purpose
There are banks that give home loans only for property-related reasons. You cannot use this money for other things, like buying a car or taking a trip. The bank pays the seller directly or releases money in stages if you are building a house.
6. Lender’s Assessment
Before the bank agrees to the loan, the bank checks your income, existing debts, job stability, CIBIL score, and the value of the property. They want to be sure if you can handle the EMIs or not.
7. Tax Benefits
Indian tax laws help you to claim deductions on both the principal and interest you pay, as long as you stick to the rules. These benefits help lower your total tax and make buying a home a bit easier on your wallet.
8. Prepayment Facility
If you want to pay off your loan sooner, most banks let you make extra payments toward your principal. For floating-rate loans, you usually don’t pay any penalty. With fixed rates, some banks may charge a small fee.
9. Fixed or Floating Interest Rates
While determining the home loan interest rate you will pay, you are provided with two options:
- Fixed Rate: Your interest rate and EMI stay the same the whole time. No surprises.
- Floating Rate: The rate changes along with the market. Your EMI could go up or down.
10. Top-Up Loans
When you maintain a good repayment history and show you are a reliable borrower, banks might provide you with a top-up loan as part of your home loan journey. This benefit becomes clearer when you understand what is home loan and how lenders reward responsible borrowers. You can use this extra money for things like home improvements or your kid’s education, usually at interest rates close to your home loan rate.
11. Eligibility Criteria
When you apply for a loan, banks determine your age, income stability, employment status (salaried or self-employed), and, most importantly, your CIBIL score to evaluate your eligibility and the loan amount.
Challenges of Home Loans
While there are many advantages of a home loan, it comes with a few challenges, such as:
- Long-Term Commitment: When you have signed up for 15 to 30 years of installments. Your life circumstances might change, but the EMI obligation remains.
- EMI Pressure: Missing payments hurts your CIBIL score and can lead to penalties. If things go wrong, the bank can take your property.
- Limited Loan Amount: Banks approximately cover only 80-90% of your property value. You need to arrange the remaining amount, usually 10-20%, as a down payment from your savings.
Conclusion
Understanding what is home loan, is the first step toward turning your dream of owning a home into a smart path without any extreme financial burden. It is a powerful tool that lets you use your future income to buy a valuable asset today, giving you long-term stability and great tax benefits. You get to move in now and simply pay it off bit by bit each month.
However, picking the right property is just as important as finding the right loan. That is where trustworthy developers like Globe Realty change everything.
If you are looking for a home or a smart investment in Ajmer, look no further than Globe Realty. Since our properties are ADA and RERA-approved, we act as your trustworthy partner throughout the entire home-buying journey. We ensure a seamless loan process so that you get total peace of mind, knowing your investment is safe.
Whether you are looking for luxury villas or affordable flats, we help you find a space where every rupee is truly worth it.
FAQs:
1. What is a home loan?
A home loan is money borrowed from a bank or financial institution to buy, construct, or renovate your property.
2. How is the interest rate determined for a home loan?
The home loan interest rate depends on certain factors like RBI guidelines, bank policies, your CIBIL score, income, loan amount, type of property, and whether you choose fixed or floating rates.
3. How long does it take to get approval for a home loan?
If your paperwork is done, you will usually hear back from the bank with an approval in just a few days. The full sanction takes a bit more time, mostly because they want to double-check your info and the property details.
4. How does a home loan work?
Whenever you demand a home loan, the bank or financial institution figures out how much you are eligible for before providing the money. They send the money directly to the seller, builder lor you (as demanded), and then you start paying it back through monthly EMIs until you have cleared both the principal amount and the interest.
5. Can I repay the home loan before the tenure ends?
Yes, most banks let you pay off part of your loan early or close it out completely, especially if you are on a floating-rate loan. Usually, there’s little or no penalty, thanks to current regulations.
6. What happens if I miss an EMI payment?
Missing an EMI can result in a late fee, penal interest, and a negative impact on your credit score.
7. Can I get a home loan if I have a low credit score?
It’s possible, but with tougher terms, maybe a smaller loan, higher interest, or the need for a co-applicant or extra security. Some banks just won’t approve it at all, depending on their rules.
