Buying a home is a huge decision and there is a lot to learn before you start shopping for your dream home. Being prepared for what’s to come will help make the process easy and painless.
The recent increase in focus on the affordable housing segment, a lot of positivity is noted in today’s anxious population who had resorted to rented space as the only solution. This, in turn, has spurred growth in the housing finance sector for financing the home. Comparing and understanding home loans is a tedious job and like any other financial product it is important for a home loan buyer to be abreast on the processes and intricacies of the legal and other practical aspects to avoid any surprises.
Below are some simple tips / factors that one needs to take into consideration before applying for a home loan:
- Eligibility: Before opting for a home loan one must assess his / her current financial liquidity and arrive at an estimated amount on how much one can comfortably afford. The loan amount should be able to derive a specific monthly instalment and repayment amount. One should take into consideration any changes that might affect your future income patterns, interest rates fluctuations and the type of lifestyle.
Try to close any other loans which are active as they might reduce the eligibility factor while applying for a loan. Banks generally give loans up to 80 percent of the total property cost and this can fluctuate as per the eligibility of the home loan applicant. Assessing your need is a crucial step while applying for a home loan and one needs to do his / her due-diligence before taking it further.
- CIBIL Score: Banks take into account CIBIL scores before disbursing the loan amount and its corresponding interest rates. Today, it has become imperative to maintain a good CIBIL score to showcase one’s financial attribute as healthy and stable. Timely payment of credit cards, other EMIs and a stable source of income contribute majorly to a healthy CIBIL score. This is an important pre-requisite to determine the capacity of the applicant.
- Type of Loans: Since the interest rate is a vital component of a home loan, it is important to understand the intricacies of the two types of loans that are offered by banks & NBFCs – Fixed & Floating interest. In a fixed rate home loan, the interest rate doesn’t change with market fluctuations while in a floating rate home loan, interest rate fluctuates with market economics and interest rates are linked to a base rate and a floating component. The base rates are decided keeping in purview the quarterly base rate announcements of the Reserve Bank of India. While the Fixed rate is recommended for a loan of shorter tenure, it is not recommended in an ideal scenario. Floating interest rates are recommended since it is usually lower than fixed interest rates.
A thorough evaluation of the requirements will help to arrive at a suitable choice of home loan.
- Lending Institution: Many institutions offer the best of interest rates but below par services to the customers. One often looks for the best customer service such as personal assistance, understanding the requirements and tagging along the entire home loan process in addition to the basic offerings details such as interest rates and tenure for the loans. While the interest rate is important, one should also look at other aspects as mentioned. One should look into the institution holistically to finally determine the best suited financial institution.
- Interest Rate: Interest rate component forms the crux of the application of home loans. Though financial institutions say their interest rates are fixed, there is always room to negotiate the interest rate on a specified amount. A reduction of 0.25% – 0.50% in the interest rates will make a lot of difference in the repayment amount. For instance, one would have to pay an amount of INR ____ for a loan of ` 50,00,000 at 10% for a period of 15 years; however, he will save an amount of INR ___ & INR ____ if the same principal was offered at 9.75% and 9.50% respectively. Whichever option you choose, do not forget that you can negotiate on the interest rate.
- Hidden Charges: One should be abreast of all the charges that will levy on the application such as processing fee, service, and administrative fee, etc. All the charges are a percentage of the home loan amount and need to be given due importance while signing the agreement. One should seek clarity from the officials on each and every charge and only then should one finalise the home loan application.