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Tips About Home Loans

Oct - 31 | | No comments. | Plots

A primary component that is essential to every home owning dream- unless you are a prince/princess or something- a home loan. This simple sounding concept is a major cog in the wheel of home-ownership, banking and general investment. So, this is vital information for anyone looking towards a home purchase in the near or far future.

What exactly is a ‘home loan’?

Home loan is basically a monetary assistance offered by a bank or other financial institutions to fulfill your residential needs. In this transaction, the purchased home itself stands as ‘security’ until you pay back the entire loan amount with interest.

Basic requirements to procure a home loan

Banks and other financial institutions have various rules concerning this factor. These rules may differ from institution to institution however; the very basic requirements are as follows-

  • Have a fixed, dependable source of income (employed/self-employed)
  • A acceptable financial record extending to atleast 6 months of active banking
  • Be of 21-60 years of age if employed or 21-65 years, if self-employed

What’s your budget?

The first step before embarking on a home-loan application is to decide on your budget. A standard home loan will cover upto 85% of your requirement (the overall cost of the property). You will need to raise a minimum of 15% and also separately, take into account stamp duty, registration charges, brokerage etc.

Are you eligible for a home loan?

This step is the crucial juncture of this process and decides the loan amount for which you are eligible. This eligibility criterion is calculated based on your total income and overall liabilities (other financial commitments such as car loan, etc). In case your spouse also has an active income, he/she can be included in the proceedings as a joint applicant- this increases your eligibility for a higher loan amount. Usually, your EMI (Equated monthly Installment) for the loan can be upto 40% of your monthly income.

Calculating Interest Rates and other Fees

An ‘interest rate’ is additional payment that a bank/financial institution charges over the granted loan. These rates vary from institution to institution and through certain periods of time through the year when special promotional offers and discounts are in place. As a thoughtful consumer, consult various banks/financial institutions, research through media like newspapers- television and the internet before zeroing in on a provider with the interest rate that’s just right for you. Beware of such banking terminology as ‘fixed rate’, ‘floating rate’ and ‘reducing balance’.

Floating Rate: In this option, the interest rate changes depending upon the retail prime lending rate (PLR).

Fixed Rate: In this option, the interest rate remains constant throughout the repayment tenure.

Reducing Balance: The interest on your loan amount is calculated based on daily, monthly and annual reducing balances. It’s prudent to opt for daily or monthly reducing balance, where the EMI is low, compared to annual reducing balance.

Discuss these factors thoroughly before deciding on an option that suits you best. Also, banks charge separate charges such as processing fee, commitment fee and admin fee. These must be ascertained by you and used as a factor when deciding upon a bank/financial company for the loan.

What is a ‘Pre-payment’ option?

Pre-payment is an option afforded by your loan provider wherein, after a specific number of EMI payments, you can clear the entire pending amount thereby enforcing an early closure of the loan. Through this method you can save a lot of money towards the interest payments. Always keep this option as an important prerequisite when choosing a bank for your home loan.

Roundup: Important points to remember

  • Try keeping the repayment period as low as possible. More EMIs equals to more interest paid.
  • Judge the quality of service and reputation of the home loan provider. Bad service quality could also mean that the loan may cost you more and you might not get the proper customer support that you require.
  • Always remember to avail of the applicable income tax benefits.
  • Ask as many questions as possible. Your inquisitive nature will make you certain about the opportunity you are getting into. Question and seek advice from friends who have taken similar home loans.
  • Some banks/financial institutions offer incentives or other freebies with their loan package. Do enquire about them.

Simple Checklist

  1. What’s the interest rate?
  2. Basis of EMI calculation- daily, monthly or annual
  3. Reputation and quality of service
  4. Other applicable fees- what are they?
  5. Is pre-payment option available? Is there a penalty involved?

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