The Reserve Bank of India has been slowly increasing the Repo Rate, which is leading to home loans becoming slightly more expensive than they were two years ago. However, home loan interest rates continue to be the lowest they have been in a long time and thus, now is as good a time as any to avail of a home loan. Home loans are a long-term commitment. Most home loan borrowers choose to repay their loan over 20 to 30 years and therefore, a home loan affects the way a person lives for almost two decades or more. It is, thus, that home loan borrowers are advised to avail of a home loan after carefully weighing all the pros and cons and preparing themselves well for the journey. Borrowers are also advised to spend some time doing research and making sure they have found the right home loan for them. In this article, we walk our readers through some tips that will help them choose the right home loan for them.
Smart Financing: How To Choose The Right Home Loan For You
Tips on How to Choose the Right Home Loan:
1. Negotiate for a Low Home Loan Interest Rate
The home loan interest rate you get will determine how easy or difficult it will be for you to avail of a home loan. Borrowers are advised to negotiate for a low home loan interest rate as low home loan interest rates help one keep their EMIs affordable and the total interest outgo on the lower side. A low home loan interest rate also helps one reduce the total cost of borrowing the loan. Thorough research and hard negotiations go a long way in helping one avail of a low home loan interest rate deal. Home loan applicants can also benefit from adding a woman co-borrower to their application as most lenders offer home loans at a slightly lower interest rate to female borrowers or applicants. Further, having a stable job and income and a high credit score can also help one secure a low home loan interest rate deal.
2. Apply for a Loan Amount You Are Eligible For
When it comes to buying a home, most people want to go all out. However, that is not always the right approach. Applying for a home loan amount higher than you are eligible for will lead to a home loan application rejection. In case your home loan application does get approved, you will find the process of repaying the loan burdensome and difficult. While applying for a home loan, keep two things in mind:
- In general, lenders approve home loan applications only when the debt-to-income ratio of the borrower is under 40%. In other words, if more than 40% of your income is going towards covering debt, your lender will doubt your home loan repayment capacity and may even reject your home loan application. If they do extend you a loan, know that it will be on unfavourable loan terms and conditions. So, when you do apply for a loan, apply for a loan amount that allows you to keep your debt-to-income ratio under 40%.
- Lenders sanction anywhere between 75% to 80% of a home's value as a loan. The remaining amount must be arranged by the home loan buyer as a down payment. To enhance your chances of loan approval and availing of a loan on favourable loan terms and conditions, do not apply for a loan amount of more than 80% of your home's value.
3. Discuss Processing Fees and Prepayment and Foreclosure Charges
While submitting your loan application, you will be asked to pay a home loan processing fee. This home loan processing fee is used to take care of expenses related to your account. For instance, your lender will regularly send you updates about your account. The loan processing fee is used to take care of expenses related to these communications. Similarly, when you apply for a loan, you will be assigned an agent. Your lender will use the loan processing fee to pay your agent. Most lenders charge 0.25% to 0.50% of the home loan amount as loan processing fees. However, this fee is negotiable and you can talk to your lender to reduce it. Some lenders completely waive the loan processing fee during the festive season. So, if you can, wait to apply for a home loan during the festive season.
Borrowers must also discuss prepayment and foreclosure charges in advance as well. As per the latest RBI guidelines, borrowers on a floating rate of interest can prepay or foreclose their loan at any given time without paying any prepayment or foreclosure penalty. However, borrowers on fixed interest rates must still pay a prepayment and foreclosure penalty. Before you sign a loan agreement with your current lender, talk to them and negotiate the prepayment and foreclosure charges. Further, read the loan agreement carefully and make sure there is no stipulation in it that forbids you from transferring your home loan from your current lender to another should another lender offer you better loan terms and conditions. In general, borrowers must understand the loan agreement fully before signing it. They should seek assistance in case they are unclear on any of the points, and even consider hiring a loan expert, but they should never sign a loan agreement without fully understanding it.
Final Words
Apart from the things mentioned above, borrowers must also research well, negotiate with more than just one lender, choose a loan tenor that works well for them, arrange for the down payment to ease the process of availing of a home loan, and use a home loan EMI calculator and a home loan eligibility calculator to ease the process of applying for a loan and carry out loan repayment planning.