Owning a beautiful and comfortable home is the foremost of all human desires. Opting for home loans is a step forward in that direction.Banks and Housing Finance Companies (HFCs) offer various home loans with tailor made options to suit different payment capabilities. A simple understanding of home loans can help loan seekers in applying for suitable options.
Why Home Loans?
Because rarely do people have the money to buy their dream home.
Because one can avail a loan of up to 85-90 percent of the total property cost.
Because taking a home loan offers tax benefitsBecause one can take loans with tenures ranging from one to 20 years
Types of Home Loans:
There are several types of home loans for different needs of prospective loan seeker.
Home Purchase Loans – As the name suggests, these are basic loans used to purchase new property.
Home Improvement Loans – These loans are used to renovate and modify existing properties.
Home Construction Loans – These are given out to construct a new home.
Home Extension Loans – These loans are used to expand or extend parts of an existing home.
Balance Transfer Home Loans – These are usually new loans with lower interest rates, which are used to repay an old loan.
Land Purchase Loans – These are opted to buy fresh land for construction of new homes.
Bridge Home Loans – When people wish to sell their existing home in order to buy a new home, bridge home loans can help to finance the new home until a buyer is found for the existing one.
NRI Home Loans – This increasingly popular home loan aids the NRIs in buying residential properties in India.
Interest Rates – Floating and Fixed
Interest rates play an important role in determining whether it would be prudent to opt for a home loan. Interest on home loans are usually calculated on monthly or yearly reducing balance basis, and they may either be fixed or floating.
When the interest rates charged remain constant throughout the tenure of the loan, it is known as Fixed Interest Rate. It does not depend on the prevailing market rates. Opting or fixed rate protects the loan seeker in case of fluctuating interest rates in the market.On the other hand, Floating Interest Rates is dependent on the market rate. It is directly linked with the bank lending rate and the amount of interest payable will rise and fall in accordance with the prevailing market rates.
Interest rates given by major banks and financial institions fall in the range of 10.00% to 13.50%. Public sector banks like State Bank of India and Canara Bank offer fixed interest rates in the range of 10.00% to 12.50% and floating rates between 10.00% to 11.25%. Housing Finance Companies (HFCs) like LIC Housing Finance, HUDCO and Canfin Homes Ltd. offer fixed rates between 10.00% to 12.00% and floating rates between 10.00% to 12.75%. Other financial institutions like Kotak Mahindra Bank, ICICI, HDFC, HSBC Bank etc. also provide competitive lending rates.These loans are usually given out for a maximum tenure of 20 years. A charge of 0.50% to 1% of the total loan amount is levied as processing charges.Usually, the banks and financial institutions would require the loan seeker to fund around 10-20% of the total loan amount as down payment, which has to be deposited before home loan is disbursed. Banks can refuse home loan in the absence of non-compliance of the same.
some factors that you should consider while deciding your need for a home loan.
Know your Home Loan before applying
Today Home Loan is a buzz word for property buyers, real estate experts and investors. Before you apply for Home Loan, ensure you know your income and understand how much loan you can afford.
Here are some factors that you should consider while deciding your need for a home loan.
How much loan you can afford: This first and important factor you need to consider before you apply for your Home Loan is the affordability of the property. Because you will be expected to pay around 20% of the property value that you intend to buy as down payment to the developer. Rest 80% can be taken as Home Loan. Costlier the property, bigger the loan you want, more the money you will have to put up towards the down payment.
Income Stability: If there is a risk of losing or leaving your job, you should avoid taking Home Loan. You must analyze whether your income will be able to support the EMI on your home loan or not. You should analyze considering your current monthly expenses, expense in future or in case of emergency etc. When there is a possibility of an interruption in the income, it might not be prudent to take on a huge EMI obligation.
Types of Home Loan: There are thousands of home loan companies waiting to provide you with your financial needs. It is always advisable to consult an independent home loan expert or consultant before applying for a home loan or purchasing a property. There are different types and schemes of Home Loan where you need to choose the scheme or Home Loan that suits best for your requirement. Sometimes loan rates might also vary depending upon the end use, so be informed about it before applying for a wrong kind of home loan.
Buying or Self-Construction: If you are buying property from a developer, you can either opt for a ready for delivery property or an under-construction property. You need to provide the lender with details like a copy of the sale agreement of the property, regulatory clearances, commencement and occupation certificate. For a self-construction property, you need to provide the lender details of plot acquisition like the title deed, the sanctioned construction plan from the architects, and a complete construction cost breakdown. The disbursal can be a lump sum payment, or based on a construction-linked plan.
Second Home Loan: If you already have a home, you can invest on second home. If your first home or property Home Loan is cleared or paid off, you can raise a loan against it for making another investment. In such a situation, you can take a Loan against Property (LAP).Interest rates for LAP might be different from other types of Home Loans.
Credit history: Credit history is a report which documents anything related to how an individual managed his credit. It includes information on your borrowing and repayment of credit cards, bank loans, car loans, mortgages and any other debt owed to a creditor. Lenders, such as banks and credit card companies, use credit history to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. If you have a good credit history, the lender may even be agreeable to give you a loan for a higher amount at a discounted rate.
Tax benefit:If you borrow your home loan from recognized lender such as banks and leading lending company, you can get tax relief on your principal amount and interest paid along with monthly EMI. If you are away from your property or city due to your business or employment, you can get tax relief for loan paid and you will be eligible for HRA provided by your employer in that city. Know more on Saving Tax from Home Loan.
Penalty and Charges:Before applying for home loan, know the rate of charges, penalty or fee charged by your lending company or bank for default in monthly EMI. Know the processing charge and in case you decide to switch your loan from current lender to new lender, current lender will charge penalty or fee for pre-closure of your loan.
Loan Eligibility:When computing loan eligibility, banks take into account the age of the applicant, his salary, repayment/credit history, savings, profession, location of property, and other debts. Some professions are categorized as negative or risky by the lenders while some jobs fall in the preferred list. As a thumb rule, the EMI for your home loan must not exceed 40 percent of your gross monthly income.
Improving Your Loan Eligibility
When applying for home loan, you can use following methods to enhance the availability of home loan from your bank or lending company.
Maximum Down payment: You can enhance your loan eligibility by paying maximum down payment for the loan. This will add confidence in your bank or lending company to provide loan needed for you.
Clubbing Incomes: Clubbing income is simplest way to enhance loan eligibility. You can club your income with your father, mother, spouse or son and jointly apply for the loan. Clubbing income enables you to get home loan as your monthly income will increase by clubbing the income.
Longer Tenure:When applying for long term loan or bigger loan amount, you can opt for longer tenure. A longer tenure will make you eligible for a bigger loan for the same income level.
Co-applicant: Co-applicant helps you to apply for home loan. You can either apply for home loan jointly with your spouse, family members or you can apply with your friends or other relatives. Co-applicants enable both to get tax benefit and get a higher loan amount sanctioned from your bank or lender.