Home loans have become inseparable parts of home deals today. For an individual the decision to buy a dream home depends on their eligibility to get a loan. Probably this is why people begin to plan for home loans much in advance.
To understand how home loans work, you should first understand that these are basic loans which all the popular banks offer for long run. Home loan is nothing but a monetary assistance offered by a bank or financial institutions to make a purchase of residential property. The purchased home usually stands as security until you pay back the entire loan amount with interest. Thus loans are secured loans and banks are always keen to offer home loans.
The basic requirement to get a home loan may differ from lender to lender. Usually to get a loan, you should have a fixed, dependable source of income. You may be employed and self-employed, it doesn’t hurt your stakes. You need to have a good financial history and banking transactions for at least 6 months. The age should be between 21 and 60 years of age for employed or between 21 and 65 years, for self-employed.
Let’s outline 6 important things you should know before taking a home loan.
How much you want to borrow?
First things first you must clearly know how much you want to draw from the bank. These days you can avail home loan up to 90% value of the property, however decision to borrow the amount should not be dependent on bank’s will only. The banks assess the loan amount by calculating your net income, i.e after deducting your current credit outstanding and day to day expenses from your income. Based on the net income they would calculate how much you could spare as loan EMI. As a rule of thumb, banks generally limit the loan installments at around 40 to 50% of the borrower’s salary.
Type of loan
There are two types of these loans based on the interest rate. One is fixed rate of interest and the other is floating rate of interest. When A person is taking fixed rate loan,it usually charges a fixed rate across the whole tenure. Interest is constant for the full period of the loan. On the other hand, the interest on the floating rate changes with the market rates. For example, when the market rates rise, the interest rate on the these loan goes up and when the market rates fall the interest rate on the home loan goes down. The fixed rate home loans are generally higher than current floating rates.
Tenure of loan
Major lenders offers maximum 30 year tenure for home loans. EMI is lower when the tenure is longer. Being fat loans, people with limited resources opt for 25 to 30 year loan. However, it is advisable to take a loan for the shortest tenure if you can afford. Suppose, in a 10-year loan tenure, the interest paid is 57% of the borrowed amount. This can go up to 128% if the tenure is 20 years. So, always keep the tenure as short as possible.
You can avail tax benefits with this loans and you should clearly know about the benefits in advance. You and the co applier both can get income tax deduction up to 2 lakhs for home interest. The property however need to be self-occupied to avail the benefits.
All those who have not repaid their loans will find their names enlisted in Loan Defaulter List. The default can happen when you do not pay EMI. So, the borrower must be careful about the add-on charges and penalties. It is not just the interest that you pay, there can be additional charges such as administrative and service charges or processing fees. Once blacklisted as a loan defaulter, it would take many years to restore the credit score.
Before you sign the deal ask the lender if there is any prepayment charges. By prepaying the loan you close the account earlier than anticipated and reduce the cost of loan. Many banks charge a penalty on prepayment of home loan, so if you intent to prepay, look for the loan that allows you to prepay without a charge.
Following these six points you could be rest assured of finding a good home loan deal.