Mistakes to avoid before taking a loan
We often think that taking a home loan will help us relieve us of all our pains of renting a house. However, this may not be true in most of the cases.
Most of the fiscal policies levied by government are to boost the demand of falling demand for houses in the country. Hence, with this falling demand, the rate of return on your property is also falling.
It may take almost your home loan tenure to cross the breakeven of your rent versus your home cost and most investments would give you a lot more returns on your loan amounts.
Let’s look at various myths and mistakes people make while going in for a home loan and try to avoid them before getting ahead with signing those home loan papers.
Understand your Home Loan
You must understand your home loan. A home loan is not free money. It comes with its processing fee and interest burden. In case you are taking 30 lakhs in home loan for the next 30 years at the rate of 8.5%, then you would be paying almost extra 30 lakhs in interest towards your home loan.
That means this interest would eat up all the appreciation in your property over the loan tenure.
Also, living with long-term debt is not that easy. When month after month, the major part of your income goes into home loan repayment, without building any corpus in your bank account, it’s not very pleasing.
Most people make a hasty decision about getting into debt and then dream for years living under various kinds of hardships to become debt free again.
One must evaluate this financial viability and see whether they are stable in their job, with constant increment coming their way in terms to keep paying towards their home loans.
Then you do not want to make this an extra burden on your family in case you are struck with some critical illness or pre-mature death. Hence it is advised to take life insurance to safeguard your family from this home loan.
Don’t keep visiting various lenders to get to know your loan amount. It is a simple rough calculation. Just multiply your CTC with four times and that is the approximate amount of home loan you could take.
\Making too many home loan inquiries could reflect you as credit hungry and could also impact your overall credit score and may impact your loan approval when you need it.
Not only it could land you with no loan approval, but in case, you get a loan approved, it may be at a higher interest rate than normal and you would not like to make higher payments in interest towards your home loan.
Most people plan their home loan well, often with a financial advisor and try to close it within a period of next 8 to 10 years. If this is the situation with you, then it is okay to have a home loan for you.
Your home loan should not be impacting your retirement plans, your financial obligations like your child’s marriage, your child’s education, etc. and should not bring an extra burden on you for its pre-payment.
Choosing your Lender
Many times, people thin that preferred local bank would give them the best rates and its wise to not go where anywhere else. However, that is not true every time.
Just because you are their customer, it does not mean that your bank is giving you the best rate of interest on your home loan. You must shop for at least 4 to 5 lenders and then try to negotiate with them to get the best rate.
An interest rate lowered by 1% could save a lot in your interest payments towards your home loan. Also, there are other fees associated with a home loan and while negotiating over your home loan you could easily convince your lender to waive it off for you.
Getting a pre-approved loan with the help you know your budget and shortlist your properties within your budget. However, lenders associated with your preferred builder tends to give you much better rates due to their association with the builder and they want to help you make a quick buying decision.
Understanding your repayment capacity
There are many online calculators and online banking and financial sites which lists the various home loan interests available. Do your research and calculate how much EMI you will be able to afford easily.
Remember your EMI is extra monthly payments that you need to make above your down payment. Most lenders allow you to have a loan of 80% of your property value, hence you must have enough savings in your bank account to cover your down payments (which is usually while you purchase your house), and at least next three months monthly installments.
It is often the task of your lender to ensure that you can make your monthly payments with ease without any kind of hardship before disbursing the loan amount towards you.
However, it’s also important for you to know and make an informed decision and not overburden yourself and shop within your budget.
Understand the difference of floating rate vs fixed rate home loans
Many people think that fixed rates are better than floating rates, however that may not always be true.
While keeping your home loan rates fixed throughout your loan tenure could save you from any kind of surge in home loan interest rates over that period but then you also remain deprived of the benefits of falling interest rates.
People often would go out for dual rate home loans instead. This way they get a fixed rate for some time, say next 5 years and then turn into a variable rate home loan.
Recovery Measures of Financial Institutions
Remember, by not paying your home loan by the due date, you are allowing your bank to take over your collateral, which is often your house. Depending on your lender, there is a period of 75 days to 90 days after which your bank will not accept your payments and will start with its recovery procedure.
These recovery procedures are often harsh and are supported by legal measures which leave you with no other option but give away your house which often acts as collateral in most of the housing loans.