Buying a home is one of the cherished dream of large portion of the populace and undoubtedly one of the most important financial decision of their life. More often than not, the entire family is invested financially and emotionally in the decision making. This makes it even more important for the buyer to diligently go over each and every aspect related to this big decision. Once you have finalised the property, the next big task is to identify the bank or financial institution for home loan.
Before you make a move, you should do some preparation work and some background work to avoid hassles in your home loan process.
Here are certain factors that you should consider:
Only a part of the property’s value is offered as a loan by the financing institution. Property owner needs to bear rest of the same on his own means. The banks / institution usually finances 75-90% of the property cost depending on the applicant’s eligibility, among other factors.
Prospective applicants must be prudent concerning the amount they want to avail of as a loan and what they want to pay from their savings to the builder or seller. A sizeable down payment improves chances of eligibility for a home loan. Hence, if it’s feasible, individuals may opt for a higher down payment. It will also lower their repayment burden.
Credit Score: A healthy credit score, preferably higher than 750 would help a prospective applicant to secure loan at a low interest rate. Thereby, it is advisable for a prospective applicant to check his/her credit score before applying for a home loan. It’s wise to clear all dues and look for ways to build a healthy credit score in the months leading to availing a home loan.
Associated Charges: Apart from outgoing interest, the borrower needs to pay other charges like processing fees, late payment penalties, and foreclosure charges, etc. which needs to be accounted while applying for a home loan. It is in the best interest of the applicant to sort these with the lender beforehand.
Individuals may also note that foreclosure or prepayment charges are only applicable on fixed-rate home loans. Hence, this is also a factor that should be considered when deciding between fixed and floating rate since prepayment is one of the ways to reduce tenure and save lakhs.
Type of Interest Rate: One of the most important choice to be made while availing home loan is to carefully choose between the two types of interest rate plans provided in the market as below:
Floating - Floating interest rates are subject to change over time, based on alterations in RBI’s base rate and overall market conditions. Floating rates are usually 1 percent-2 percent lower than fixed rates, enabling savings in the long term. This option is suitable if a decline in expected in the interest rate in near future.
Fixed - Fixed rates, as the term implies, do not change over time. This option is suitable when the economic climate indicates a rise in interest rates.
For a short tenure loan (sub 7 years) it is advisable to go for a fixed rate of interest. If the tenure is more than 15 years, it is advisable to take a loan on floating basis as you can’t predict the changes for such a long duration. Ultimately, the applicant need to choose between floating and fixed interest rates based on his suitability.
Adequate Insurance: A lot of people do not give equal importance to insurance while buying a property. It is viewed as an unnecessary addition on top of the home loan. On availing of such Life and/or Health Insurance, in case of any medical emergency the applicant need not to get worry about arranging the money for the medical emergencies. In case of accidental death, the family will not bother at least for other expenses as there is a policy amount to take care of the rest in applicant’s absence. So it is advisable to get oneself insured while planning to take a home loan.
Lastly, individuals must also check the documents required and read the loan agreement thoroughly. Taking out a home loan is a major decision that can impact one’s financial health for years to come. Hence, it’s vital to be aware of all its aspects and avail of a loan in total alignment with the borrower’s financial interests.
The author, Ashish Jain, is Managing Director at Star HFL. The views expressed are personal
(Edited by : Anshul)
First Published: IST