It is known to all that taking a home loan is one of the most manageable ways in which a person can afford to buy the house of his dream.
When you avail for a home loan you are signing up for depositing 50-65 percent of your salary every month to the bank in the name of Equated monthly installments or an EMI for a period of as long as 30 years which means taking as long term commitment. Hence making an informed decision should be the priority. This blog is targeted at helping the borrowers to understand the concept of home loans better.
Step 1. Estimate Home Loan monthly installments, Check Home Loan Eligibility, Decide loan amount and tenure
In order to maximize the loan amount and minimize the monthly EMI, some people end up availing home loans for a long tenure which may prove to be a mistake in the near future. To understand this concept let’s take an instance where the loan amount is Rs. 40 lakhs. On this amount of Rs. 40 lakhs loan interest of 7.90% is charged for 15 years, the EMI comes out to be Rs. 37,996/- and the total interest amount that the borrower ends up paying for 15 years is another 2,839,194/-. Now if the tenure is increased to 20 years instead of 15, at the same interest rate, the EMI is lower at an amount of Rs. 33,209/- but over this long tenure, the borrower credits another 3,970,182/- as interest, which is quite higher than on a 15-year loan.
So, the questions you need to ask yourself before availing a home loan are:
- How much EMI can you afford to pay every month – this should be within the bracket of 60-65% of your net salary.
- If you are eligible for a home loan. If yes, then considering the interest rate and the principal amount you must decide the home loan tenure. After that comes the question of EMI which you can calculate using the home loan EMI calculators. The home loan EMI calculator will give you an idea of what your actual EMI will look like before even availing of a loan. The results of these Home loan EMI calculators quick and efficient which serves your purpose.
Step 2. Approval of the property
- The property in question should be registered in the name of the seller and the entire chain from the first conveyance of the property up to the last sale should be available.
- For a property that is self-constructed by the borrower an approved map plan should be available.
- Some banks have a provision of financing up to 150% of the registry amount subject to 75% of market value. Few banks propose to restrict the maximum loan amount to 75% of agreement value and 75% of market value, whichever is lower.
- Banks don’t fund properties in gram panchayat areas or those built without approved building plans.
Step 3. Home loan interest rate- Fixed or Floating- pick your choice.
Fixed interest rates are advisable in cases where the borrower’s income cannot take any hit of unpredictable market changes affecting interest rates. In this type, the borrower sets a fixed EMI at a fixed amount of EMI irrespective of any market fluctuation. However, these loans bear a higher rate of interest as compared to floating interest rates due to its certainty. The second option is to go for a floating interest rate in which the interest rate is decided as per the current market scenario. These fixed interest rates can be expected to trend down over with time according to the market fluctuations.
Step 4. Pre-payment and foreclosure charges – A quick look.
Most of the home loans have a longstanding tenure of 30 years but most of the borrowers usually clear the loan amount before the due tenure. After all who doesn’t want to pay off the loan at the earliest and own their home wholly and solely. It is a common thing for people to waiver off their loan before their tenure by making partial or full prepayment when they have surplus money
If this is what’s in the mind of the borrower then he/she should make an informed decision in selecting a bank that allows them to make prepayments of their loan amount. The ideal scenario here should be associating with a bank that allows pre-payment without any charges or hassles. As per the circulars issued by the Reserve Bank of India, which is the central agency of finance in India, banks are strictly prohibited from charging a prepayment penalty to the borrowers who have availed a home loan at floating interest rates. As for the borrowers with a fixed interest rate on the principal amount of the home loan banks are authorized to charge a penalty on prepayment of fixed-rate loans. These prepayment penalty charges vary from 1% to 3% of the loan amount. Since this is a crucial step so this aspect should be studied carefully before choosing a bank to avail home loan from.
Step 5: Selection of bank for Home Loan
Apart from the rate of interest levied on the principal amount of home loan there are some other factors too on which the crucial selection process should be carried out.
- Customer service standards: When choosing a bank, the borrower must read the customer ratings and reviews of banks by customers who have availed loans from the bank in the recent past. Their reviews will give you an idea of how true the bank to their policies is. These people while sharing their experiences will help you make a better and informed decision as the borrower will be able to detect the shortcoming of the bank he thinking to associate with. The preferable choice should be a bank that is easy to communicate with and offers a doorstep service with utmost transparency. need to visit the bank branch.
- A full history workup of the bank should be done. The past base rate trend of the bank should be analyzed keeping in mind your current scenario. By analyzing the past base rate trend, the borrower can get a fair idea if the bank changes its rate too often. The borrower should check the privileges that the bank provides to its old customers as getting a home loan from a bank is going to be a long-term commitment.
- A bank of choice should certainly not be the cheapest one. Instead, the bank which satisfies your loan requirements is the right choice.
- Comparing multiple banks is the key to the right choice. A smart borrower will never hesitate to draw comparisons of the offers and policies of different banks. The comparison should not only be made on the interest rate but should also include hidden charges like the processing fee and customer.
Now all you need to do is get down into the field, explore thoroughly, and make an informed decision.