The world of finance is quite confusing and intimidating for most of us and when it comes to loans, the jargon used makes this an even tougher proposition to understand. But the fact is that during our lifetime, all of us may need to take a loan at some point or another. To do so without having a clear understanding of what it entails can be dangerous. In fact, understanding loans can make a big difference to you when you are in financial need. For example, a loan on property can be a life saver when you have a major expense coming that you cannot hope to meet with only your savings.Most people mistake this loan to be synonymous with the home loan. This is a very wrong and dangerous assumption that can lead you astray when you are looking for a loan to meet an unavoidable financial emergency.
The loan on property or mortgage loan
The loan that you take out on your house or apartment is also called the mortgage loan. This means that you put up the property you own as a collateral or security for the loan. Your loan is backed by this valuable asset and so it is a secured loan.
The lender has a hold on your collateral property until your loan is repaid in full. Until then, there may be some restrictions applying on what you can or cannot do with the property that is placed as security. For example, you cannot sell the property without the lender’s knowledge and express assent.
The home loan
As opposed to the mortgage loan, the home loan is a loan that you take out to buy your new home. There is no collateral used to back the loan and so, this is an unsecured loan. The loan structure, repayment, terms and conditions may be fairly similar to the mortgage loan overall since both are loan products. However, when you take a home loan, you do not place any other asset of yours under a lien with the lender.
In India, to make home ownership more attractive, the rates of home loans are kept fairly affordable. However, in general, unsecured loans are costlier than secured loans. You can determine the overall cost difference between home loans and mortgage loans by using a loan against property EMI calculator to calculate how each one works out in terms of the EMI payments required to repay the loan.
The purpose of the loan
This is another major difference between these two loans. The home loan can only be used to buy a new property in your name. The mortgage loan funds can be used as you please for a variety of reasons. If you are planning a complete renovation of your home or need to do major repairs to the property, then a loan against the property is a great option. This way, you leverage the value of the property to improve its own value again.
However, before you do this, use a loan against property EMI calculator to find out the overall cost of the mortgage loan so that you can accurately judge if the repair or renovation is worth the outlay. Typically, repairs/ renovations are done to increase the value of the property and get a better price at resale. If the potential increase in resale value does not significantly exceed the cost of your loan, this may not be worth it.
The loan amount
The amount of loan you can avail of with a home loan is usually up to 90% of the value of the property you are buying. With a mortgage loan, you can avail of a loan equal to about 60- 70% of the value of the property you place as collateral. The home loan funds are entirely absorbed by the purchase of your brand new property. However, the property secured loan funds can be used in other ways too.
An important point is that, major expenses may not be covered by your savings alone. In such cases, a mortgage loan with its potential to give you access to a vast sum can be a life saver. For example, a major medical procedure can be an enormous drain on your finances. Mortgaging your home may be the only way to fund this expense.
Processing fees
One of the most overlooked aspects of loans is that there is processing fees that applies on these transactions so the cost of the loan is not restricted to the interest component alone. In case of home loans, this processing fee may be anywhere between 0.8 to 1.2% of the loan amount you are applying for. For property secured loans, this fee may be around 1.5% of the total loan you are availing of. Apart from using the loan against property EMI calculator to calculate your EMIs, also calculate this fee and add it up to determine the cost of your loan on property.
