Taking a home loan to buy a house is a wise decision, but it is not sufficient. If you are planning to take a home loan, it is important to make yourself familiar with all the essential facts and figures to avoid any hassle in the future.
Here are 5 important facts about home loans that you should know about:
- Type of Loan – There are two types of home loan – fixed rate loan and floating rate loan. Under a fixed rate loan, the rate of interest remains fixed throughout the entire tenor of the loan. It does not change with market conditions. In the case of a floating rate loan, the rate of interest changes with the changing market conditions. A floating rate home loan is better than a fixed rate home loan. This is because if the home loan interest rate fall in future, you have the advantage to pay lower interest amounts. This is not the case with a fixed rate home loan as it is the same irrespective of market conditions. This may become a disadvantage in the future.
- Eligibility Criteria – Banks and financial institutions consider several factors before sanctioning a home loan. The maximum loan amount sanctioned is 70-80% of the value of the property. Your income is also one of the important factors that banks take into consideration. The bank usually approves loan amount to the extent of 40-50% of your total annual income. It does not consider allowances and reimbursements. Also, if you have any existing liabilities in your name, the same will also be considered. Some banks also consider the number of dependents in your family. If you have more dependents in your family, your repayment ability is considered low by the bank. A co-applicant can you a higher amount of loan as the income of the co-applicant will be clubbed with your income. You should be aware of all these facts before applying for home loan.
- Interest Rate Negotiation – Whichever type of loan you choose, you must negotiate on the rate of interest on the loan. Every bank would try to put a higher interest rate on your home loan, but you can get it lowered down. For this, make sure that you have a good credit history with a good credit score as a good credit score attracts a higher loan. Most banks have monthly targets on getting high-valued customers, so try to take advantage of this aspect through negotiation.
- Tenor Selection – There are often misconceptions about choosing the tenor of a home loan. Some say that a short tenor loan is better while others are of the view that long tenor loans are better. But it is all about your requirements. If you have a floating rate home loan and the interest rates rise in future, you need not worry. You can request the bank to adjust the loan tenor so that you do not have to pay higher EMIs. Similarly, if you want to repay your loan faster, you can opt for a shorter loan tenor. Hence, it all depends on your requirements and the convenience of making payments.
- Loan Balance Transfer – In the face of changing market conditions, you can always opt to switch or transfer your home loan without any hassle if you get a better loan offer from any other bank. The only charges that you will have to bear are the processing fee and the prepayment penalty charges. However, most banks also waive off these charges when negotiated with reason.
It is very important to understand all the terms and conditions of a home loan policy. Make sure you are aware of all the facts about the home loan before signing on the loan agreement.