Tips on Taking Home Loans
If you have visited any website that talks about buying a home or taking a home loan; they all glorify the fact that owning a home is a dream for everybody and how this can easily become a reality. But they forget to mention that sadly sometimes you get a rude awakening from this dream!
Why? The answer is: because you overlooked a few simple things. Read on – so that your dream does not remain a dream and at the same time does not give you nightmares.
Useful tips on taking home loans
1. A Pre Approved Loan Helps
Ajay after six months of search found a house that fitted his budget and his requirements. He applied to a bank for a loan and paid the deposit amount to book the house. The bank began its process and after six weeks Ajay was informed that his loan was rejected due to a minor technical aspect. Ajay just had two weeks left before he was supposed to pay the builder failing which he would lose the house and the deposit too. He had no choice but to approach a private bank which promised him a loan in two weeks time but the interest rates that they charged were higher.
You do not want this to happen to you. So get a pre approved loan in case you are planning to buy a house in the near future. You can get better rates, are sure about getting a loan and will not miss the bus when you finally find a house that you like.
A pre approved loan is usually valid up to six months.
2. Read and Understand Terms Well
For any financial product that you buy it is always advisable to understand the basic aspects well before you even start looking around for the product. In my experience of working at a financial institution I have several times come across customers who come complaining to the bank about how they have been cheated or fooled.
However often it is simple things like not reading the fine print or not understanding a term that is the root of the problem. Do not expect the company representative to educate you; all information is easily and widely available on the internet so spend time and understand terms like EMI, fixed v/s floating rate, fault, BPLR etc.
This will help you in making an informed decision and also in planning ahead and if nothing else it will make you sound wise during a conversation!
3. Buy Home Loan Insurance
Owning a home provides you and your family with a sense of security but you must ensure that asset does not turn into a liability. You must insure your home loan as in case of the death of the primary loan applicant, the insurance company pays up the unpaid loan amount.
Illustration: Mr. Basu bought a home 5 years back and took a loan of Rs. 25, 00,000 for the same. The house was worth Rs. 35, 00,000 at the time of purchase. When he passed away; his wife faced a big dilemma.
Mr. Basu did not have home loan insurance although he did have life insurance; the house was worth almost Rs. 50, 00,000 and she was in fix; she did not want to lose the house which had appreciated in value and could have provided them with the much needed security.
She did not want to use the life insurance money to pay the loan and she could not own the house as it had a huge unpaid loan. Home loan insurance would have saved the day the day for them!
Some companies offer this insurance as a freebie like ING Vysya so there is no extra cost involved; it is also a good idea to check about the permanent disability clause where the loan company pays in case of a permanent disability of the insured.
4. “Fixed” is actually not fixed
When you begin your home loan journey one of the crucial decision you will have to make is about the interest rate type. These rates and types vary across banks and you will most commonly come across terms like fixed rate and floating rate. Read fixed vs floating rates article for more info.
Fixed rate theoretically means that the rate remains fixed over the loan duration. Irrespective of what you go for always keep in mind the fact that a fixed rate is not fixed in the real sense of the word which means that hidden somewhere in the fine print is a clause which says the bank will revise the rate after a fixed period or due to some xyz condition.
You cannot change this fact so what should you do? When you take a loan you plan your budget and prepare to pay a fixed EMI every month but be prepared(mentally and financially) that this can change suddenly with a letter sent by the bank.
So spare yourself sleepless nights and keep some money aside for such exigencies. While you take try and adjust to the higher EMI (be assured the bank is rarely/never going to lower the rate) you can use this exigency fund to pay the differential.
5. Compare Deals and Rates
When you start looking for a loan you will realize that there is a lot of variation in the rates of interest; while interest rate is the most important aspect that you must consider when taking a loan it is definitely not the only aspect. You should also look at the loan period, processing fee charged, security cover clause*, free insurance provided by some companies etc. Always negotiate and look for available discounts.
Don’s Stretch Yourself Financially:
Taking a home loan does involve careful planning and cutting down on some expenditure about but do not get overoptimistic about your potential of cutting down your expenses. A bank makes an evaluation about your creditworthiness but you should also take a realistic view of you situation.
Ideally you should reduce your debt burden before you take a home loan and your EMI must not exceed 40% of your salary in hand. Also do not exhaust all your savings when buying a house; keep aside a chunk for situations like an increase in the EMI,(due to interest rates revision),paying additional security, job loss so that you can still pay you EMIs on time etc.
Being forewarned is being forearmed so keep the above in kind and get the best deal for yourself. There are a large number of players in the market so getting a competitive and good deal is not difficult as long as you are sure about what you want.
*Security deposit clause gives the bank a right to ask for an additional security deposit in case the property value comes down.