Home Loan Advantages and Disadvantages

Purchasing home is a big decision and if one is taking loan for the purchase of home then it gets even bigger because as far as middle class is concerned it is a big liability because home loan usually last for 25 to 30 years and in order to repay loan for such a long period of time one needs to analyze all aspects and then take the decision whether to take the loan or not on the basis on future expected inflow of income. Given below are some of the advantages and disadvantages of home loan –

Advantages of Home Loan

1. The first and foremost advantage of home loan is that an individual gets a tax rebate on the interest paid by him or her so for people who fall under high tax bracket taking home loan can be a good option as one can save taxes by showing interest on housing loan as a tax deduction while filing income tax return.
2. Another benefit of home loan is that interest rate on home loan is lower as compared to other loans like personal loan, vehicle loan, mortgage loan and so on which in turn puts less burden on the borrower as far as monthly interest payments are concerned.
3. Capital appreciation is another major benefit of home loan, because over the past few decades’ capital appreciation in the case of property prices has been much higher than the interest required to be paid on housing loan. So for example if an individual has taken home loan of $100000 at interest rate of 10 percent to purchase the house and if the value of house goes to $400000 in 10 years then the interest of 10 percent will not be a bad deal for the borrower as capital appreciation will take care of interest expenses.

Disadvantages of Home Loan

1. The biggest disadvantage of home loan is that it goes on for many years so as far as an individual is concerned he or she has to keep earning money so that he or she can repay both the interest as well as principal component of the home loan and if due to some unforeseen circumstances he or she become jobless then it can lead to default on the loan and bank or financial institution taking over the home of the borrower.
2. Another limitation of home loan is that it is not necessary that the value of the home will rise in the same way as it has risen in the past few decades so an individual who is taking a home loan in anticipation that capital appreciation will take care of interest rate can be a mistake. So for example, if in the above example if the value of house remains at $100000 or falls to $80000 then an individual who took the house in anticipation of capital appreciation can be in trouble because of the interest has to be paid no matter what the value of the house is.
3. Another disadvantage of home loan is the presence of opportunity cost because many people do not take into account the opportunity cost factor into consideration. So for example, if instead of locking $100000 in purchasing a house an individual can invest that amount in equity market or make a fixed deposit or invest in other income-generating securities and as far as home is concerned he or she can take it on rent. So if the rent of home is $500 per month and an individual is earning $1000 from $100000 of his or her investments after paying interest on loan then this $500 can be considered as the opportunity cost of capital.

As one can see from the above that home loan has many benefits as well as limitations and any individual before taking home loan should carefully analyze both the aspects and then take the decision whether to take a home loan or not.