Home Loan or Own Funds: A Classic Dilemma
By Joseph Samson
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Owning a house is a dream cherished by all. Although it is an expensive wish to fulfill, most people work hard to buy a sweet abode for themselves. While arranging the funds to meet the expenses of buying a house, almost every home buyer faces the dilemma of making a choice between utilizing one's own funds for the purpose or to opt for a home loan.

Arriving at a suitable decision requires the prospective home buyers to do some calculations to find out which option will be most beneficial to them. The suitability of each of these two options depends on the following four factors:

Loan amount - It is the total amount of money that an individual will get from a lender as funds to buy the house. The loan amount received from the lender will become the principle amount on which a borrower also has to pay interest over the tenure of the loan. But, this interest does not comprise the ‘loan amount'.

Interest rate on the loan - It the rate charged by the lender for allowing the borrower to utilize the funds for purchasing the house. Usually, interest rates on home loans are charged on fixed rate basis, floating rate basis or in the form of hybrid loans, which is a combination of fixed and floating interest rates.    

Tenure of the home loan - Home Loans availed from banks or other such financial institutions have to be repaid within a specific time period called the ‘tenure' of the loan. Normally, home loans are long term loans with a minimum tenure of 5 years to 15-20 years.     

Interest earned by own funds - It refers to the interest generated by an individual's own funds if they are kept invested (for an example in fixed deposits etc), instead of being used to pay for buying the house. Own funds refers to lump sum amounts belonging to an individual like inheritance, savings or existing investments.    

Figures falling under each of these categories are important and will influence an individual's decision considerably. For instance, the entire sum of the home loan, if availed, plus the existing interest rate will naturally bear an effect on the equated monthly installments (EMI) and the time period of the loan. Even a small change in EMI will have an effect on the loan tenure and likewise any alteration in interest rates will modify the EMI amount. Plus, the returns on own funds would decide whether an individual should buy a house using his own funds or should he opt for a home loan? Again, if the answer to this question comes out to be the latter, then how much home loan should be availed also depends on the interplay between these key variables.

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