10 Key Factors to Consider While Taking a Home Loan

1. The Rate of Interest:

The interest rate of your home loan plays a significant role in deciding whether or not to avail of a loan and which lender to choose. We all are aware that we should do thorough research before finalising the lender. Apart from that, you should also be aware of the different types of interest rates charged by the banks and housing finance companies.

• Floating Interest Rate: Floating interest rate, also known as variable interest rate, may change during the loan tenure as it is subject to the current lending rates. Your EMIs will change with the change in interest rate. With the current trend of decreasing home loan interest rates, it is advisable to opt for a floating interest rate.

• Fixed Interest Rate: As the name suggests, in a fixed interest rate home loan, the rate of interest remains the same throughout the loan tenure, and thus, your EMIs do not change. It will help if you opt for a fixed interest rate loan when the rate of interest is low, and an upward trend is expected in the future.

• Hybrid Interest Rate: Hybrid interest rate or combination interest rate is a combination of floating and fixed interest rates. Many lenders offer a fixed interest rate for a certain period, which then can be switched to a fixed interest rate. This type of interest rate could be a wise option when you get a home loan at a lower interest rate, which is anticipated to go up after a certain period, but you plan to repay the loan before the floating rate starts.

2. Loan Amount:

Your loan amount impacts several things in the home loan. The rate of interest generally differs for the loan amount up to 30 lakhs, above 30 lakhs and up to 75 lakhs, and above 75 lakhs. Since a home loan is a long-term commitment, it is advisable to opt for a loan amount that you will be able to repay comfortably for a long time. Instead of opting for a loan amount that you are eligible for, you should avail only what you can afford to repay without any delay or defaults as it can negatively impact your credit score and future loan eligibility.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds

3. Loan Tenure:

Home loans are generally availed for a longer loan tenure of up to 30 years, depending upon your eligibility. The longer loan tenure helps you lower the monthly repayments but ultimately increases your total interest outgo. Whereas choosing a shorter loan tenure can create a burden of huge EMIs. Hence, it is advisable to choose the right loan tenure to make your monthly repayments smoother and save you from paying huge interest. In case your property is under construction, your loan will be sanctioned in stages based on your instalment schedule with the developer. In such a case, you are required to pay only the interest amount, called the pre-EMI interest. But, if you wish to start repaying the principal, you can start paying the pre-EMIs.

4. Down Payment:

Suppose you applied for a home loan of Rs 70 lakhs, and the bank approves it for Rs 50 lakhs based on your eligibility. In this case, you will have to pay Rs 20 lakhs from your pocket. This amount that you pay on your own is called a down payment. You should make as much down payment as you can without stressing your budget, as it will help you lower the loan amount. The lower the loan amount, the lower the interest you will pay. Many banks offer 100% loan amount of the property value, based on your eligibility. However, to avoid paying huge interest and ensure a comfortable repayment, you should make at least a 10% to 20% down payment.

5. Processing Fee:

The lender charges you a processing fee to process your loan application. The amount of processing fee depends on the loan amount as most banks and housing finance companies charge processing fee as a fixed percentage of the loan amount. The processing fee for a home loan is generally between 0.5% to 1% of the loan amount. However, some lenders offer flat processing fee irrespective of the loan amount. Since the home loan amounts are usually high, even a small difference in the percentage can make a considerable difference.

6. Pre-Payment Charges:

Since buying a home is a big financial decision for most people, many of them are emotionally sensitive about owning a debt-free home. Hence, they prefer to repay it as soon as possible to reduce their debt burden. Pre-payments can either be part-payments where you make a lump sum payment towards the principal amount or foreclosure where you repay the entire loan amount before the completion of the loan tenure. By making part-payments whenever possible, you will be able to save a substantial amount on interest and become debt-free earlier. Most banks and housing finance companies do not charge with pre-payment and foreclosure charges after a certain period or after a certain percentage of the loan is cleared. However, some lenders charge you a certain amount for making pre-payments and have limitations on the number of times you can make pre-payments and the pre-payment amount. Hence, before availing of a loan, you should get a complete idea about the pre-payment charges and choose a lender that allows pre-payments with zero to minimum charges.

7. Pre-Approved Home Loan:

If you haven't yet finalised your property, getting your home loan pre-approved before finalising the property is advisable. Having a pre-approved home loan will give you a clear idea of your loan budget and help you negotiate with the developers better. It will also make the loan process quick and easy. Lenders mostly have tie-ups with several developers. So, by asking for a list of approved developers in your preferred area, you can find the best properties at the best deals.

8. Documentation:

The financial institution will ask for certain documentation for both pre-approved home loans and regular home loans. These documents can be categorised as KYC documents, income documents, and property documents. However, the first thing that the lender checks is your credit score. Before applying for a loan, it would help if you check your credit score and make sure you have an above-average credit score. This will help you with the speedy loan approval.

• KYC Documents: These are your identity and address proofs. So, the banks and housing finance companies typically ask for your PAN Card, AADHAR Card, Passport, Driving License, Voter ID, etc.

• Income Documents: Income documents will vary for salaried individuals and business persons. So, the lender will ask for your last 3 months' salary slips, banks statements, income tax returns, computation of income for the last three years, etc. based on your occupation.

• Property Documents: The lender performs due diligence on the property before approving the loan. Hence, you need to submit the agreement to sell the title deeds, etc., to the lender.

9. Home Loan Insurance:

Home loan insurance or loan cover term assurance is a type of insurance plan that provides financial protection to your family in case of your unfortunate demise. In an unfortunate event, the insurance company will repay the outstanding loan amount for which the insurance cover is purchased. This ensures your family would not have to take a financial burden of the unpaid dues. Many banks and housing finance companies insist on buying a loan cover term assurance plan to avoid any defaults in case of an unfortunate event.

10. Inability to Repay:

Before taking a home loan, you should anticipate your future financial condition as not being able to repay the home loan instalments or defaulting on the loan can negatively impact your credit score. Besides, if you repeatedly miss the monthly instalments, the lender can take legal action and sell your property to recover the dues. Therefore, if you are facing a cash crunch, it is advisable to talk to the lender and try to negotiate on the loan terms. If you are an old customer of the lender with good credit history, the lender might consider your request.

To Conclude:

Since buying a home is a big financial and emotional decision, you should consider all the above mentioned factors and choose the right type of loan and the right amount that will not burden you later. Moreover, it is advisable to do thorough research online before choosing a lender. You might find better offers on interest rates and other fees by doing a quick google search. But, make sure you speak to your primary banker as well, as they can offer you the best deals and service.

Warm Regards,
Ketki Jadhav
Content Writer