Opting for a home loan is a major financial decision that largely affects the financial state of an individual for or several upcoming years. Normally people believe that banks and other financial institutions are willing to lend but getting a home loan sanctioned can be a difficult task. You should be aware of the various formalities and paperwork necessary for availing of a home loan. If you are a first-time home buyer then there are a lot of things to consider like interest rate, repayment period, credit score, additional charges, tax, insurance, documentation, and more. This article lists things to consider before taking a home loan in India.
The most effective way of checking your loan eligibility is by estimating the EMIs with a home loan calculator. Financial organizations limit the installments to 40-50% of the borrower's gross monthly income. Besides, if you are having existing loans and liabilities the eligibility for a new loan goes down.
Apart from the financial credentials your overall portfolio also affects the bank's decision off the landing. For example, people with stable income have relatively higher chances of availing of a loan than self-employed individuals with erratic earnings. Your age also plays an important role in defining the number of earning years left. Typically home loan repayment periods do not go beyond the retirement age.
Type of Loan
There are two types of the home loan depending on the interest rate. Fixed-rate home loan and floating rate home loan. In fixed-rate loans, the interest rate remains constant irrespective of market fluctuations. The interest of a floating home loan varies according to market conditions. The terms vary from bank to bank and are applicable for a fixed tenure or a sharp rise in interest rate. Hence the EMIs also move up and down due to fluctuations in the base rate.
If you think that a fixed-rate loan is a more value proposition then think twice. Experts recommend opting for floating-rate loans. This is because in floating-rate loans the interest rates will come down at some point in time even if they are high in the current situation. In a fixed-rate home loan, the borrower has to pay the same amount even if the interest rate goes down. Hence a floating rate loan makes a more sensible choice unless there is a sharp rise in the interest rate due to economic changes.
Apart from the EMI of your home loan, financial institutions and banks charge additional fees at the time of applying and approval of the loan. Discuss all these charges with the bank before your loan approval. A prepayment penalty is another important thing to consider at the time of availing of a home loan. According to recent RBI home loan rules and regulations, financial institutions or banks are not entitled to charge a prepayment penalty. It gives you the flexibility to make complete or partial prepayments whenever you have surplus cash available.
Negotiating the Rate
Any types of home loan you choose do not forget to negotiate with the interest rate. Although the lending institution will always have an advantage, you can still try a bit of bargaining at the time of availing of the loan. If you are an old customer with the bank and have a good credit history you can negotiate the interest rate and loan amount quite a bit. Banks always look for good business opportunities and customers with high credit scores should take advantage. Besides, you can also try purchasing a loan in the latter half of a month. Every Bank has its monthly targets and may offer flexible schemes for a new customer.
Keep an Eye on the Loan Tenure
With the changes in the base rate banks also increase the rates of floating home loans. It eventually puts more pressure on the borrower. Most cannot afford the steep rise in the interest rate and request the lending party to increase the loan term. Even though it brings down the monthly installment but eventually long loan tenures cost you more.
Option of Switching Lenders
Availing a home loan from a specific Bank doesn't always require the borrower to stick with the same lender. If you can find a better deal from another borrower you can easily switch your home loan. There are no prepayment penalties on floating-rate home loans. The processing fee will be the only additional cost for switching your home loan. You can also negotiate or ask for a reduction in the loan amount.
Getting a home loan is a once-in-a-lifetime decision and hence you need to select the right product for yourself. It is important to have basic knowledge about the different components of a home loan and ways of selecting the right scheme. Keeping above mentioned home loan points to keep in mind before opting for a home loan is always beneficial. It will help you in finding the right kind of scheme as per your financial needs and objectives. You must always opt for schemes that give you sufficient flexibility and do not put much pressure on your existing financial state.
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