What are the different types of home loans?

By Team Wealth

TODAY, there are innumerable choices available for whatever product you buy.

Right from a toothpaste to a television, you can select the one that suits your needs the best.

So, why should home loans be left behind?

Depending on the purpose (buying a new home, renovating your existing home etc.), you can select a relevant loan.

Home improvement and extension loan
You can take this loan if you want to carry out either partial repair work in your home, renovate your home, buy furniture or to extend the home by adding extra space.

Short-term bridging loan
This is a short-term loan to help you during the interim period of the sale of your old home and the purchase of a new home.

It is given for a maximum of two years. Security for the loan is a first mortgage of the new property in favour of the lender.

Land purchase loan
If you wish to buy a plot of land, you can take this loan. You can get a loan for up to 85 per cent of the cost of land.

Home equity loans
This is a smart way to raise money for personal use. Let's see how it works.

Let's say you purchased a property of Rs 20 lakh in 2000 by taking a loan of Rs 15 lakh. Your property was mortgaged to the bank as security.

In the year 2006, your property value has gone up to Rs 30 lakh while your loan outstanding has reduced to, say, Rs 11 lakh. As a result, while you owe the bank only Rs 11 lakh, you have mortgaged property worth Rs 30 lakh to him. So, the bank has a healthy margin on its side and can afford to lend you more money with the same security. This way, you can take a home equity loan against your existing home.

In the case of HDFC Bank, the maximum home equity loan amount is 60 per cent of the market value of the house minus your present loan outstanding.

So, coming back to our example, you can borrow up to Rs 7 lakh (Rs 18 lakh minus Rs 11 lakh). The interest rate on this loan is usually the current interest rate prevailing in the market, that is, the Prime Lending Rate (PLR).

Thus, this may be a far cheaper option than a personal loan or a credit card.

Lastly, whatever loan you take, you can choose between a fixed rate or a floating rate of interest.

Disclaimer: The contents of the article or are for information purpose only and are in no way meant to be advisory in nature. The author does not claim responsibility for actions taken by readers on the basis of the Article. Please consult your financial advisor for your personal money management.