Purchasing a house implies investment of substantial amount of time and money and therefore, involves making quite a few tough decisions. One of the trickiest of is the selection of the correct Home loan.
Lack of information can often lead people to inappropriate schemes or keeps them from availing beneficial schemes from the banks. To simplify this, we have tried to present all the important information on home loans in a clear and concise manner to help you make decisions.
About Home Loans
Banks can finance up to 85% (90% for loan amount below 20 lacs) of the agreement value of the loan against the down payment of the remaining 15%. In this case, the house acts as a security for the loan. Usually home loans have to be paid back within a time period ranging from 1 to 20 years at an agreed interest rate. In addition to the down payment, the buyer has to fully bear stamp duty and registration charges.
Home loans can be availed for a variety of purposes such as home purchase, land purchase, renovation and construction, NRI home loans etc.
Most buyers consider lower interest rate as the sole criteria for selection of a home loan. A closer look at the types of interest rate options will help us understand why this might not be the best practice.
Fixed interest rate
Fixed interest rates remain constant during the entire tenure of the loan. However, most lenders offer semi-fixed or dual rates on interest where the interest rates remain fixed for the first few years (usually 2 to 5 years), after which loans are converted to the existing floating rates.
Borrowers often prefer fixed rate home loans because it offers them the luxury of planning their monthly budgets in advance. However, the “Money Market” clause in loan agreements allows lenders to increase interest rates in dipping markets without consulting them. So, buyers are not completely safe from the effects of market fluctuations. Moreover, fixed rates on loans are always a percent or two higher than their floating counterparts and make it difficult for the buyer to foreclose the loan by charging penalty of 2% on the outstanding loan amount if the amount prepaid is not from his own income.
Floating interest rate
Floating rate home loans may use Prime lending rates or Base rate systems and these may increase or decrease, depending upon the market conditions. Floating rates are lower than fixed rates and allow further reduction in installment amounts when the rates go down. Moreover, these can be foreclosed anytime during the loan period without any penalty.
However, occasional (but rare) increase in the rates might affect the budget planning of the buyers and put them under financial strain. Also, lenders are often hesitant to lower the rates and thus, the benefit of dips does not reach the borrower as quickly as one might expect.
1. Banks consider a variety of factors such as educational qualification, credit rating, job security, savings, repayment capacity etc. of the buyer before deeming him eligible for the loan.
2. It is advisable to have a home loan insurance especially on hefty loans, so that the insurance companies can step in to fill your shoes in case of a mishap such as job loss, accident etc.
3. Section 80 c of the income tax act allows for a deduction of 2 lakh rupees from one’s taxable income against interest payment on home loan.
4. All terms and conditions of a housing loan are negotiable. The better the credit rating or repayment capacity, the easier it is to negotiate.
It is important to understand that the home loans must be selected keeping ones finances and future needs in mind. The best way is to contact multiple lenders, weigh your options and then select the loan that best suits your needs.
So, this was our dedicated post on home loans. If you are looking for a property on sale in Mumbai please visit ThePropertist.com
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