Home Loan

If you are getting ready to apply for a home loan and are new to it, then you must read on to understand some basic yet important concepts……

WORDS: SANGEETA SINHA

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IF finding the perfect home to buy is important, it is equally so to find the right home loan. If you wish to get a home loan, a little planning in advance will help you in more ways than one. Start by doing some good market research. Check out the eligibility criteria, rate of interest (both fixed and floating), repay option, balance transfer etc. of different banks, both private and government. A good home loan should give you the lowest interest rates throughout the loan tenure and should also give you the option of part payment or balance transfer.
It is a long-term investment so make sure that you have the finances in place to pay the EMIs. Though home loans are easy to get these days, most banks sanction only 85 per cent of the property value. This means you will have to arrange for the balance amount which you will need to pay as down payment. Planning and saving in advance will help you make a bigger down payment which in turn will lower your EMI’s monthly.
Once you are through with the down payment, you then need to make sure that your EMIs are affordable. Paying huge EMIs can be a burden on your monthly budget if not managed properly.
If you choose a longer tenure your EMI may decrease but overall you end up paying more interest; a shorter loan tenure makes you loan-free faster with low interest. Interest is calculated on the principal amount and therefore a quick repayment of the principal amount leads to lower absolute interest payout.
Paying more than the regular EMI can also help reduce your principal outstanding which in turn will reduce your interest. It is a good idea to keep a watch out for lower interest rate offers and if you find one you can always re-finance your loan by switching. However, switching a loan may add processing fees so keep that in mind. Keeping all points in mind go for the EMI amount that you can afford.

Fixed or Floating
Theoretically if you expect the interest rates to fall you can opt for floating rates while if you expect it to rise then fixed is a better option. But markets fluctuate and we are not always sure of the trend. Both fixed and floating have their pros and cons. Based on your personal requirement choose your plan and if you are unable to decide, opt for a combination loan which is part fixed and part floating. You can switch between a fixed and floating rate at a nominal fee
With a fixed rate the interest doesn’t change with market fluctuations and you pay fixed equal installments over the entire period of the loan. This definitely gives a sense of certainty but this security comes with a price; fixed interest rates are usually 1-2.5 percentage points higher than the floating rate home loan. Also if for any reason the interest rate decreases, the fixed rate home loan doesn’t get the benefit of reduced rates.
The rate of interest with floating loan scheme varies with market conditions but they are cheaper than the fixed rates. It has a drawback of uncertainty due to the uneven nature of EMIs. It may get difficult to budget as the EMIs may increase. So it is up to you to decide what option suits you best. Do your homework well before signing on the dotted line.

Loan Pre-payment
Home loan prepayment is early repayment of a home loan by a borrower which can be done in part or even full. Home Loan Prepayment is a good idea because it helps you save the interest money. So if you have excess cash it is always a better option to repay the loan.

Check with your bank for any pre-payment penalty. Some banks do take penalty charges if you repay your loan earlier and close your account. However, the Reserve Bank of India has said that banks should stop charging a penalty to customers who decide to prepay and close the loan account. But this applies to only floating loans and not the fixed ones. So if you have excess cash, check with your bank about the pre-payment penalty and get rid of your loan and in the process save money you would have paid as interest.

CIBIL score
It is important to maintain a good CIBIL score if you wish to get your home loan processed smoothly and fast. High CIBIL score gets you a loan without any issue while with a low score you may find it difficult to get your loan processed and sometimes you may even be charged high rate of interest.
People with low CIBIL score are considered risky by banks. It is important that you pay all your dues on time and improve your score. The first thing banks check as soon as you submit your loan application is your CIBIL score. Though there is no cut-off, generally a CIBIL score of 750 and above is considered good.
It is a good idea to ensure that your credit history and personal details are in order before applying for a home loan. You can purchase your credit report yourself, online at the CIBIL site, by paying a nominal amount of Rs.470.
If your loan gets rejected by any bank due to low CIBIL score it is better to try and improve your score rather than applying in different banks; their checking on your rating may not work in your favour.

Home Loan Balance Transfer
Balance transfer of a loan is often done by customers for reduced interest rates; the entire unpaid principal loan amount is transferred to another bank for a lower rate of interest. Your original bank gets the unpaid amount back and you start paying the EMI to the new bank that took up your loan.
But it is important that you do a proper cost benefit analysis before transferring your loan. Lot of points have to be checked like the difference between the interest rates offered by the two banks, the amount of the loan left unpaid and the tenure remaining. Don’t forget to add the processing fees also which the bank will charge.
You may also think of resetting your home loan with your existing bank itself. You can write to your bank to get the resetting done. Banks often agree to it as they want to retain their customer.

Terms simplified
Collateral – Your property acts as a security for the lender. In case you are unable to repay, the bank can legally takeover your property.
Tenure of Loan – Tenure is the length of contract and it can range between 10 and 25 years based on your income and age.

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Down Payment – It is the money you pay before taking the loan. You don’t get 100% loan, some amount you will require to pay upfront. It is a good idea to save some money for this as this will reduce your loan liability.
Equated Monthly Installments (EMIs) – This is the monthly repayment which includes both the principal and the interest.
Rate of Interest – It is either fixed or floating. Fixed one remains same throughout the tenure of loan while floating changes depending on market conditions.
Co-applicant – A co-applicant is the co-borrower of the loan who can also claim income tax benefits on the home loan along with the borrower.
Guarantor – A guarantor is liable to repayment if there is a default by the borrower.