All of us have thought about taking a home loan or at least have wanted to know more about the same, at some or the other time in our lives. Although, it may seem like banks are more than eager to offer you loans at competitive rates, getting one sanctioned can be quite a tedious task. Like any other transaction, it is important to know what you are getting into before you take the final plunge. Here is some important point to keep in mind before putting your name on the dotted line.
A crude way to calculate your loan eligibility is by calculating the EMI. Banks usually limit the installments at 40-50% of the borrower’s salary (basic plus dearness allowance.) Reimbursements and allowances are not considered for this. A few factors that broadly affect the loan eligibility are:
- No. of Dependents
- Source of income
- Age (Yours and co-applicants)
- Value of Property
Loan Type: Depending on the amount of research that you have managed to do on this topic, you would know that there two major types of loans, namely Fixed and Floating. As is apparent from the nomenclature itself, A fixed loan implies a fixed rate of interest whereas a floating rate implies a changing rate dependent on the market conditions. Try to research well on the real estate trends, and figure out if they are likely to rise in the near future. Base your decisions on the market conditions and trends. Typically, home interest rates show a downward graph, making choosing a floating rate, a more desirable option.
The Fine Print: The devil lies in the details! A home loan agreement is often written in a legal language and thus, can be quite tricky to comprehend. Make sure you read each and every word carefully before taking the final plunge. In fact, if it feasible, try to take the help of a legal or financial expert to understand the legal implications of each term.
Negotiate the Rate: Count your positives and make sure that you know how to haggle. It is not a very well-known fact but interest rates on loans can b negotiated. If you have a good credit history and have always paid your dues on time, use it to your advantage to show that bank that you are a viable prospect.
Longer the tenure, costlier the loan: The RBI has been hawkish in its monetary policy for quite some time now. An increase in the base rates means the banks have also been increasing their floating home loan rates. For the borrower, it means a higher EMI. Many can’t afford such rise and often request the bank to re-adjust (increase) the loan tenure to bring down the monthly outgo. While it can be a temporary relief – if you are in a desperate situation, in the long term you actually end up paying more.
You have the option to switch lenders: If the deal from another bank is significantly better than the one you are being offered currently; please note that you do have the option to make a switch. Most banks have done away with the prepayment penalty. Hence, the processing fee is the only additional cost.