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Home loan vs. Mortgage loan

The difference between these two types of loan is very subtle and the following paragraph will help you untangle the same. Both these loans are against a property that you are planning to buy and the application process remains the same.

In the case of a home loan, the money is directly given to the builder or seller of the property by the lending institution and the person who avails this type of loan cannot use the money for any other purpose. It is a closed end transaction and usage is restricted to buying the property and the money is returned to the lending institution in regular instalments by the borrower. In a scenario where the borrower defaults in paying back the instalments, the lending institution can revoke the purchase and take back the property. This type of loan is suitable for people who have some immediate reserve of money to pay the initial down payment to the builder along with registration which is close to 20 % of the total cost of the property.

Now what is a mortgage loan and how different is it from a home loan? In this type of loan the house is secured to the lending institution and stated explicitly in the legal contract signed by the borrower as well as the lender. This may not be the case in the home loan as it can be either secured or unsecured. The legal document serves as an instrument for the credit granter to hold the property and provides conditional ownership to the borrower. Also the borrower does not receive any money from the bank – rather he/she gets this document.

So why does a person choose this option to buy a property and what is the benefit accrued by doing so? Usually this option works out well when there are not sufficient funds to pay the down payment for the home purchase and this option will allow the lending institution to fund the same by holding onto the property till the entire amount is repaid by the borrower. Now a quick clarification required here is , how it is different from a loan against property? Loan against property is an open ended loan and it is applicable when a person already owns a property and uses it as collateral to borrow money from the bank and this money can be used for any purpose. Once a borrower repays the amount borrowed with interest then the property ownership is transferred back to the borrower. No wonder Albert Einstein went on to say that he finds quantum mechanics much simpler than the science of finance!

But not to worry here as in both cases your home is pledged to the lending institution and as long as you pay the interest with regular instalments and clear the same you get to own the property. Also you get the tax exemption benefit for taking one of these loans from the government.

But keep in mind about one crucial aspect that comes with these loans. This is a big decision that can impact your financial status which in turn can have strong repercussions in your lifestyle. So please have an open dialogue with your family, friends and finally the financial advisors before you jump into buying that dream house. If you are not sure of repaying the loan amount within the time frame given by the lending institution , you will end up losing that house.

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