Important things you need to know before taking a home loan

These have been specifically designed so that you don’t miss out on making those dreams come true without having to pay all the money up front. However, applying for a home loan can seem like a complicated process. There are many factors associated with a home loan that you should be aware of before applying for a loan. The most prominent ones are listed below: –

1. Factors that can affect eligibility criteria: The best way to calculate your home loan eligibility is by calculating the EMI. Banks generally limit the amount to 40% and 50% of the borrower’s income, including the basic salary and the shortage allowance. It also considers the credit history of a borrower. Therefore, if you have an existing loan or a low credit score, the loan amount will be reduced even more or you may have to pay a higher interest rate on the home loan. People with stable incomes, a strong ability to pay, and a good credit score find it relatively easier to get a loan compared to those with irregular income and poor credit history. Plus, having a co-applicant makes it easy for you to get a home loan.

2. Understand your loan type: Banks offer home loans with two types of interest: the fixed-rate loan and the variable-rate loan. The fixed rate loan is a type of home loan in which the interest rates remain the same and the borrower has to pay a fixed EMI for the life of the loan. On the contrary, in the case of a floating interest rate, it varies according to market conditions that lead to a fluctuation in the amount of EMI more frequently. This is why fixed rate home loans have an interest rate of 1 to 2.5% higher than variable rate loans.

3. The interest rate: Whatever type of home loan you choose, don’t forget to negotiate the rate. Although banks will always have an advantage, you will have to haggle on this, especially if you have been a loyal customer of the bank and have a savings account with the same bank. The negotiation would be much easier if you have a clear credit history. In addition, you can also benefit if you apply for the loan at the end of the month. Since banks have business goals, they can be more flexible at this point if they want the business.

Four. The fine print: A home loan agreement is a legal document that contains all the details of the loan. If you think that not paying EMI on time will only get you in trouble, you are wrong! There are many hidden clauses in the fine print. Therefore, it is recommended to read the final loan agreement documents carefully before signing the dotted line. Be careful of the loan processing fee, penalty charges, hidden riders, service charges and prepayment penalty, etc. Any negligence in this context would lead to bigger problems down the road.

5. Longer loan term means more expensive loans: As a general rule, the longer the loan lasts, the more interest you are likely to pay over a period of time. Many can afford this increase, but not all can. Therefore, it is advisable to apply for a loan amount that you can easily get back in a shorter period. This way, you may have to pay huge EMIs, but for a shorter duration and without further propping up the interest rate.

Here are some things to keep in mind when applying for a home loan. Keep in mind that getting a loan from a bank does not mean that you are stuck there until the moment your loan is fully paid off. You always have the option to change. You only have to pay the processing fee in this exchange process and also the prepayment penalty (if charged by your current bank).