Imagine buying a home on a loan and carrying its obligation for 15-30 years. You need comprehensive home loan planning involving calculation at each step of your journey to make it smooth and hassle-free. By being watchful, you can reduce your liability considerably while enjoying your stay in your dream home. Carefully planning your home loan journey is indeed vital. Let’s check out the factors considered important before applying for a home loan online or offline.
Evaluate These Factors Before Applying for a Home Loan
A home loan is a mix of two things, primarily. Cost and documentation. The below-mentioned factors centre around the two. Let’s find out!
Home Loan Interest Rates
Home loan interest rates are one of the crucial aspects determining your repayment summary. The rates are about 2-3.50% (Spread) above RBI repo rate on average. The Repo Rate is the one at which the RBI lends to commercial banks.
Presently, the repo rate stands at 6.50%. The higher the repo rate, the higher will be the interest rate offered by lenders and vice versa. Currently, the interest rates of most lenders range from 8.75-9.95% per annum.
While one can’t do anything about the repo rate as it’s dependent on inflation prevailing in the economy, one can certainly bargain with lenders to minimise the spread. A good credit score of more than 750 will only help you bargain better.
Reduced interest rates will keep your EMI amount lower and allow you extra to spend on your necessities.
Understand the Interest Rate Dynamics
Home loan interest rates are basically of two types – floating and fixed. A floating rate loan will have interest rates changing with the change in the policy repo rate by the Reserve Bank of India (RBI) in its monetary policy meeting. Presently, the rates seem high. But as inflation cools, the interest rates will come down too.
A floating-rate home loan journey will always have differing repayments. One thing is for sure, the EMI amount will remain constant unless you request the lender to change it. The principal and interest component of the loan will vary with the change in interest rates.
A fixed-rate home loan will have the same interest rate. But does it make a fixed-rate loan better than a floating-rate loan? Not at all! Fixed-rate loans will always be around 4-5% above a floating home loan.
Home Loan Amount Disbursal
Remember that home loans are not financed fully. They are financed up to 75-90% of the property cost. Loans of up to INR 30 lakhs account for up to 90% of the property cost. Whereas loans above INR 30-75 lakh are disbursed at up to 80% of the property cost. Loans above INR 75 lakh are up to 75% of the property cost.
So, if you are buying a property worth INR 60 lakh, you can get a maximum loan of INR 48 lakh. The remaining INR 12 lakh and the extra amount (if any, agreed upon deal with the property developer) is your liability. So, prepare accordingly.
Choose Your Tenure Wisely
Home loans are offered for up to 30 years based on your current age, income, the time left for retirement, etc. The longer tenure can reduce your EMI amount but raise your interest repayment. It is thus advisable to opt for a relatively shorter tenure to curb interest payments and keep EMI amounts affordable at the same time.
Get an Idea of the Home EMI Amount in Advance
Equated Monthly Instalment (EMI) is an addition of both interest and principal amount every month. Whatever the tenure you choose, the loan breaks into monthly EMIs. It’s important to get an idea of the EMI amount beforehand using the Home Loan EMI Calculator. The calculator takes into account the principal amount, interest rate and tenure to calculate the EMI. So, enter the three variables in the prescribed space to get EMI estimates.
The calculator will help instill a financial discipline and let you repay the home loan EMI on time. It will help build a strong credit history, which will further bolster your chances for other loans you apply for in the future.
Processing Fee & Other Charges
The processing fee usually ranges from 0.25-1% of the loan amount plus GST. While some lenders include legal and technical fees under the processing fee, some keep them separate. However, the overall fee amount remains within the percentage as stated above. For example, a 60-lakh home loan will likely come with a processing fee of INR 15,000-60,000. Adding 18% GST, the overall amount comes as INR 17,700-70,800.
Plan Your Home Loan Prepayment Journey
Be flexible when it comes to home loan repayments. You will always have the opportunity to close the loan before the original tenure. Use your savings to prepay the loan either fully or partially. Either way, you can reduce your interest repayment. You need to use the home loan EMI calculator and analyse the amortisation table carefully. The amortisation table shows you estimates of principal, interest and outstanding balance every year.
So, even if you apply for a home loan for 20 years, you can prepay the loan amount in 16 years using enhanced earnings over time. Or you can make partial prepayments every 5 years.
Documentation
Applicants will need to submit documents to get their identity, income and property authenticated by the lender. Documents for identity will be anything from PAN Card/Passport/Aadhaar Card/Voter ID/Driving Licence.
Income documents for salaried will be the salary slips for the last three months along with ITR for 2 years. Self-employed will have to submit ITR and income computation for three years in support of income proof.
Property documents such as the title deed, agreement to sell, margin money and others need to be submitted to initiate the property mortgage process based on which the home loan gets disbursed.
Wrapping Up
A home loan is indeed a massive financial obligation. Being careful in choosing the right loan option at the best interest rates and other repayment terms will indeed be crucial in curbing the flow of interest payments. Tune in to zarooribaathai.in for more Insightful content on personal finance, economy, women empowerment, beauty, health, etc.
