You are all set to invest in a home but naturally finances are a worry. With a plethora of financial institutions, this is probably the easiest way in which you can fund your dream home. Here are some aspects to keep in mind when you take a home loan.
Your home is arguably the most important investment decision of your life. Not just because it involves the largest outflow of finances but also because your home really is that space you can call your own and reflects your personality. Naturally when scouting for options for a home loan, you are faced with several questions on how to do things right. Also with the myriad options comes the complexity of making the right choice. Home loan agreements run into several pages in a minutely small font and can certainly leave you feeling dazed. However women have some advantages that can be looked into. “Many banks offer reduced interest rates for female borrowers. This can vary from 0.01% to 0.15%. While this looks like a small percentage, the period of home loans are usually in the range of 15-25 years and small differences can add up to substantial savings. For example, a difference of 0.05% on Rs.50 lakh loan for 15 years can save you approximately Rs. 27000. So it would be a good idea for the woman to be the primary applicant or co-applicant for a home loan. However, keep in mind that the interest rates are closely associated with the risk profile,” says Rati Shetty, Chief Product Officer (CPO), BankBazaar.com. So what are the aspects to keep in mind before you take a house loan? Here is a checklist that can help.
Do your research
Different banks offer different interest rates for different tenors, charge different processing fees, and have different repayment options. It is essential that you look into all of these carefully and compare all these factors before you take a decision to get the best deal.
Check with your Bank
It is a good idea to first check with your bank first regarding the loan. Since you are already a customer it is likely that the bank may offer some benefits like minimum documentation or waiver of other fees. This is more important if the loan is of a longer tenure and you are looking at prepayment.
This is one of the most important parameters – CIBIL stands for Credit Information Bureau India Limited which provides a credit score on a scale of 300 to 900 based on existing track records. “One should always keep her/his CIBIL clean and without any default, to ensure a higher credit score,” says Rishi Mehra, Founder, Deal4Loans. Incidentally if you want to check your score log on to https://www.cibil.com and pay Rs.550 to know what your score is.
Do The Math
Before taking a loan make a realistic assessment on how much EMI or equated monthly instalment you can afford to pay. This comprises a combination of the principal and interest that is to be paid to the bank. It is best to restrict your EMI to 40-45% of your net monthly income. If you earn more, you can always pre-pay your loan or invest in funds that provide you higher returns than your loan interest. Also as banks will not lend you 100% of the amount you will need to buy a home, you will need to make arrangements to raise some money on your own from your savings.
Apart from the interest, you also need pay processing fees, documentation charges, legal fees, and other expenses. Keep these costs in mind when you calculate your total outflow as they can have an impact on how much you actually end up spending. Banks usually charge a processing fee. For example if you are taking a loan for Rs 20 lakhs and the processing fee is 1%, then you will have to pay Rs 20,000 as the processing fee. Hence ensure that you choose a bank that has lower processing fees. Some banks may not charge any processing fee, but will charge an administration fee, application fee etc.
Home loans typically come with two types of interest rates fixed and floating. If you are opting for a fixed interest rate, it is mandatory to read the fine print. A reset clause means that this rate can be changed if there is a sharp rise in the cost of funds to banks. Floating interest means that the interest rate can change anytime depending on the RBI norms, Government policies and market conditions. The interest rates charged by public sector banks are generally less than those imposed by the private banks. However while choosing a housing finance institution select one where the interest is calculated on a monthly reducing basis as against an annual reducing basis.
This story appeared in the May 4, 2017 issue of Femina here: