Home loans- An unavoidable debt for most!!!
Nowadays when the inflation rate is soaring and the prices of real estate are sky rocketing, buying a home is a distant dream for many. Several people are averse to the idea of taking a loan and others fear the unforeseen debt trap. However taking a loan to create an asset such as your home need not necessarily be a bad idea. We at Fpguru.com call this ‘the good loan’ and today we would like to throw light on the various pivotal points to keep in mind while availing such a loan.
Loan amount: A home loan, though a liability for you helps you to achieve your goal of buying a house. It helps to create an asset, which will only appreciate over time, thereby making it very beneficial. Though it’s a personal asset, it is essential as you & your family need a roof over your heads. However, how much loan to avail is the question. Taking on more than one can afford can turn this dream into a nightmare.
The loan amount depends upon several factors such as your monthly income, age, other debts etc. It is important that your monthly EMI does not create a deficit or is not more than you can pay each month. Ideally, you must ensure your total EMI’s do not exceed 35% of your gross monthly income.
While applying for a loan, one must also remember that a certain amount of money is to be kept as margin money for various processing charges which may go around 2% - 8% of the loan amount. Hence, ensuring you have that amount ready for payment is a necessary step.
Tenure: The tenure of the loan plays a very important part. The longer the tenure, lower will be the monthly EMI but at a higher cost of borrowing. This is because your interest component of payments increases. However, if you want a short term loan at a low cost, the EMI’s will be very high. Hence, choosing a tenure offering an affordable EMI and not simply a low cost and short tenure is very important.
Interest rate: A bank offering you a home loan will offer you a choice between a fixed interest rate and a floating interest rate. A fixed interest will remain fixed through the tenure, thereby giving you a defined amount which is to be paid each month. This allows for budgeting and helps to have a structured outflow. However, this rate is nearly 1% - 2% higher than the floating interest rate and also, does not provide the borrower with the benefit in a falling interest rate scenario.
A floating interest rate changes with the changing economic scenario. It is not the most ideal budgeting option, though it does have the benefit of the falling interest rates. Floating interest rates are also cheaper than the fixed interest rates thus giving them a leverage to rise while still enabling the borrower to save some money.
Penalty and other charges: There are several charges which are attached to a home loan. It is very important to be aware of them before making the final decision as these can sometimes turn out to be very high.
Processing fee: This is around 1 – 2% of the loan amount. This fee is to be paid while availing the loan and is sometimes forfeited even if the loan is denied.
Late payment penalty: In the event of delayed payment of EMI’s the bank charges a certain penalty. This can be around 2 – 3% of the EMI amount.
Legal charges: Some banks may further charge you a fee for legal verification, while some may simply take it from the processing fees. Certain banks have a separate charge for administrative and overhead cost as well.
Pre-payment and refinancing: In the event of a windfall gain, one often thinks of pre-paying their debts. However, banks may have their own policies regarding pre-payment options and it is very important that you are aware of these policies before you avail a loan.
Recently, pre-payment charges have been abolished hence, making it further consumer friendly.
Refinancing, where in you take a new loan to pay off an existing loan,is also an option which can be availed by the borrower. This allows him the opportunity to benefit from a lower rate of interest being offered elsewhere.
If you are going to benefit by shifting your loan to another company, you can surely do the same but beware of the pre-payment clauses as well as the fresh processing fees to be paid again. Most times these can lead the refinancing option to be a very costly one.
Insurance for home loan: So you have taken a home loan and have now purchased your dream home. However it is very important to insure your home against a calamity. Having a home loan insurance will ensure that in the case of your unfortunate demise, the insurance cover will clear the bank dues and not bring your home up for sale. The security of your family will be ensured.
So, go ahead and buy that house you have always wanted. Give your family and loved ones the joy of living in a place they can call their own. But do keep the above points in mind. A loan taken to achieve your goal such as your home need not be such a scary idea after all!
By Shalmali Kulkarni.
The writer is working as a para-planner with Fpguru.com
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