Published on: 05 January 2015
A home buying decision depends to a great extent on the amount of home loan you can avail. However, before you decide on borrowing, do keep these important things in mind before applying for home loans in India.
Getting a home loan involves a lot of paperwork and documentation and it can be time consuming and exhausting, especially considering the hunting for a home that you would be performing.
Thus, before you choose a home loan in India, following are the seven important things that you should keep in mind, especially if you are a first time housing loan seeker:
1. EMI affordability:
The main factor that influences home loan from a borrowerÔÇÖs purview is probably the EMI, the monthly outflow that will go towards repaying your loan for the at least the next 10-15 years. Do not over stretch yourself, thinking that you are bound to earn more in the future and thus, you can push a bit and get more loan and hence, take on an additional EMI. As a golden rule never let your EMI exceed 40-45% of your net monthly income. If you earn more, you can always pre-pay your loan with additional disposable funds as most banks do not have pre-payment penalties currently.
2. Down payment:
Once you know how much EMI you can afford, you need to check how much you can contribute from your own pocket. You will need to contribute at least 20-25% of the property value you choose. No bank will give you a 100% home loan. If you need to buy a property worth Rs. 25 Lac, a bank will at the most grant a home loan of approximately Rs. 20 Lac, and you will have to arrange for the remaining Rs. 5 Lac. Further, check your home loan eligibility, whether or not you can get the amount you seek in the first place. Any difference in the loan amount will also be going from your pocket or you will have to cut down your overall budget. One more important thing is the fact that many sellers demand some percentage of deal in cash (popularly known as black money). Please not that this would be off the records and banks will not cover this. Therefore, beware of dealing in part cash (black money) since you will be the person bearing this and not the bank.
3. Tenure of the Loan:
This is where you will need to decide between lower EMI at start and higher interest payment or lesser term and higher EMI but lower interest payments. If you need a higher loan than what your EMI affordability allows you, you can opt for a longer tenure. This will reduce your EMI and banks might grant you a higher loan amount. However, you will pay more interest in the long run, but you can get the loan at affordable monthly cost as of today. In this case, you can still cut down the tenure by pre-paying the loan. Any future raise in income can be consolidated and used in lump sums to pay off the loan before the tenure as pre-payment penalties are almost non-existent now.
4. Interest Type:
Remember that this is the trickiest part. Home loans typically come with two types of rates of Interest (ROI) ÔÇô fixed and floating. Fixed ROI means that the interest rate will remain constant for a period of 5-10 years and in some cases throughout the tenure of the loan. Floating ROI means that the interest rate can change anytime depending on the RBI norms and various government policies and market conditions. This can go below your current ROI or increase. Fixed ROI will be higher than the floating ROI at that moment. Fixed ROI should be opted if you feel that the ROI is already on the lower side and the ROI can only increase from here or else floating should be opted. You can always switch between fixed and floating ROI anytime during your tenure, but check on the switching charge that banks might charge, which might or might not apply to your home loan type, yet there is no harm in being doubly sure.
5. Charges and Penalties:
Generally, there should be no extra charges except for the processing fees, legal verification charges in some cases, stamp duty on home loan amount, and certain switching charges, if you were to change your EMI or transfer your loan to another bank or NBFC. However, there will be certain penalty if you default on your payment along with added interest in some cases. Make sure you are aware of all these charges and ask the banks to provide you in writing, a list of all the charges applicable in all cases and never take their word for acceptance. There might be some charges for releasing your property documents for photocopying purposes or any other, during the tenure of the loan.
6. Insurance for Loan:
This is the most important step you must perform once you get the home loan disbursed. Get a home loan insurance or get yourself an insurance equivalent to the home loan amount. In case of any unfortunate event, your loved ones will still be able to live in the house and your home loan insurance will pay for the pending loan amount. Further, there are certain insurance policies that will provide you with benefits in events such as disability, loss of job, and some critical illness diagnosed for the borrower. Moreover, please consider this cost in the overall affordability criteria, since it is over and above your EMI cost.
7. Tax Benefits:
Beware of all the tax implications and tax benefits that you are entitled to receive while servicing your home loan. You are entitled to complete exemption of interest on home loan in India you pay; up to an amount of Rs. 150,000 and up to Rs. 100,000 on the principal amount. Avail these benefits. However, if you were to sell your property within the first 5 years, the tax you saved on interest payments will be added to your income from sale of property and will be taxed, please keep that in mind.
Therefore, it is advised that you do not rush into any home loan decision just based on any single factor. Always ask for quotes from at least two to three banks or NBFCs and analyse them in light of every factor mentioned above.
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