To most Indians, home ownership is a milestone in life and not a mere financial move. It is stability, security and financial growth in the long run. A house offers emotional satisfaction and a feeling of success.
Nevertheless, as the property prices increase, a majority of home buyers rely on home loans in order to buy a home. Although a home loan enables one to own a home, it is a financial obligation that is very costly and needs to be well organized. The home-buying process should be stress- and money-wise comfortable before signing a loan agreement which is why it should be understood by buyers that there are several aspects to know before entering into a loan agreement.
Evaluation of your financial capacity is one of the initial steps prior to applying for a home loan. Most purchasers commit the error of choosing a house on the limit of loan a bank can provide. What is more vital is whether the EMI can be paid comfortably over the next 15 to 20 years. According to Vijay Raundal, Managing Director , Teerth Realties, “Preferably, the monthly EMI must be not more than 35 to 40 percent of the monthly income of a borrower.
This is to make sure that money will still be left to spend on daily expenses, saving, insurance and emergencies. The buyers must also bear in mind that there are quite a few other expenses associated with buying a house including stamp duty, registration fee, upkeep and interior finishing.
Good financial planning is to be ready for any unforeseen circumstance and not to experience unnecessary financial pressure.
It is also worth having the buyers know the way in which lenders assess loan worthiness. Generally, banks determine how much a borrower can take in the form of loan by evaluating his or her income, financial obligations, stability at work and age. The eligibility requirement of salaried persons and the self-employed professionals may vary slightly. Knowing these will enable the buyers to plan their finances and papers.”A good credit score is important when taking out the home loan. It also depicts the discipline of a borrower and his financial record. The lenders mostly favor those who have a credit score of 750 and above. An increase in credit score does not only enhance the possibility of loan approval but it might also enable the borrowers to get a good interest rate. To continue having an excellent credit score, one must be a wise borrower and pay the outstanding loans and credit card payment on time.“The other misjudgment that buyers commit is when they take a loan with the first bank they encounter. Various banks and housing finance firms have varying interest rates and terms in loans. Any little variation of 0.5 percent in interest rate can have important consequences on the total repayment of the loan throughout the loan period. Customers are thus advised to put out bids to various lenders before concluding.
One should also know whether the loan will be on a fixed interest rate or floating interest rate. A fixed rate has an advantage of stability in terms of EMI payments whereas a floating rate may alter with the market conditions. The choice is the correct one and it is pegged on how the borrower plans his or her financial transactions and whether he or she is comfortable with market dynamics,” Vijay Raundal adds.Another factor is the time period of a home loan. The majority of home loans are in the range of 10 to 30 years.
A longer tenure period results in a lower monthly EMI, but it also increases the total interest paid over time. Although a longer loan term might seem promising due to the reduced monthly payments, it can seriously reduce the price of the loan. Buyers should aim for a long tenure to make the EMI payable and the interest as low as possible.Borrowers are also supposed to know the significance of prepayment options. Most of the lenders permit borrowers to make installments to loan principal throughout the period.
Even the minor supplementary charges paid regularly would go a long way in decreasing the total interest payments and the term of the loan. Knowledge of the prepayment policy adopted by the lender can thus assist the borrowers to manage their finances in a more effective way.“Although financial planning is necessary, legal due diligence of the property is also necessary. The buyers should also see that the property is well titled and has been given all the approvals by the concerned authorities.
Land ownership documents, building approvals, and completion and occupancy certificates are supposed to be checked cautiously. Any loopholes in records can result in severe legal issues in the future.
Even though banks undertake their verifications before giving out loans, buyers should also carry them out to establish the legal status of the property. The buyers should also make arrangements regarding the down payment.
Most banks finance approximately 75 to 90 percent of the property value, and this has to be financed by the buyer. An example would be, when the property costs 60 lakh, and the bank funds 80 percent of the property, the buyer will be required to raise Rs. 12 lakh as a down payment. One should plan and save this amount way before the time of purchase to escape the financial strain at the time of buying,” says Roundal.
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The tax benefits that come with home loans should be known to the home buyers as well.
Under the current tax laws, borrowers are allowed to take deductions on the principal repayment and the interest paid on the loan, subject to limitations. Such advantages have the potential of lowering the total cost of the home loan and help to make owning a property a more viable option in terms of financial planning.It is also crucial to know that the home loans can come with a number of other fees besides the interest rate.
These may consist of processing fees, legal and technical verification fees, documentation fees, and even foreclosure fees or prepayment. Knowing these costs up front will prevent customers who get into loans without knowing about these costs. A large number of borrowers also opt to get insurance on home loans, which will cover the balance of loan in case of unexpected events.
Mandatory in most instances, this may offer an extra sense of protection of the family of the borrower financially.Lastly, borrowers are to establish a safety net in terms of finance before engaging in a long term loan. Home loans take over decades and in this period, there are unforeseen circumstances of medical emergencies or changes of jobs. Saving at least six months of EMIs and household costs would allow the borrowers to cope with the hard times without fearing financial issues. A home loan is not merely a method of funding a house purchase.
It is the start of a long financial ride. It can be a manageable obligation with proper planning, wise decision-making, and tight financial control. An intelligent purchase of a home does not only form a valuable long-term resource but also a lifetime treasure of having a home to call home.
