Facts About Home Loans
A loan is a type of debt. The borrower needs to repay the lender the sum of money loaned part by part over time in order to clear the debt.
Acting as a provider of loans is one of the main tasks for financial times. For other institutions, issuing of debt contracts such as bonds is a main source of funding. Bank loans and credit are one way to increase the money supply.
Home loans are loans that are taken for the purpose of buying a house. Home loans are secured loans. The house acts as a collateral or security to the loan. Buying a home is one of the major decisions a person has to take during his/her life. Everyone today wants to have his/her own home where he/she can sit and let all problems out of their mind. But it is not possible for person to pay for a home at once. A home loan is an essential part of any home buying attempter. Taking a home loan is a long journey, which involves many stages. The key to getting your home loan in a smooth way is being familiar with the entire home loan process.
Here are a few points one need to bear in mind at the time of taking a fresh loan or evaluating existing loan structure:
1) Eligibility is an important issue, especially since the floating rate option prevails. With any increase in home loan rates not only would you find it necessary to sign up for a much longer tenure than you had earlier envisaged, but that too for a substantially lower amount than you would have received at today’s rates. Here’s how it works. The sum or amount of home loan that you would be eligible for depends on a combination of factors that determine your repayment capability, ranging from your income level to age, loan tenure to existing liabilities and so on.
2) With each home loan rate rise, the overall amount that has to be eventually to be repaid to the lending institution increases to a certain extent. Now if the present income levels do not justify that higher repayable amount, either the amount sanctioned may be reduced to compensate for the higher rates or you may need to opt for a longer tenure 20 years instead of fifteen. If you wait for too long and the rates go up by two per cent, it may affect your application on both fronts, resulting in a lower amount sanctioned plus a longer tenure, which is the kind of ‘double impact’ you really don’t need!
3) In the long run, floating rate loans make the most sense due to the cyclical nature of the finance markets. This format is also ideally suited to those belonging to the business community, as they are more comfortable in dealing with fluctuating rate movements. Moreover, since they tend to receive large chunks of money occasionally, it is feasible for them to pre-pay part of the loan. This enables them to counter the sudden spurt in tenure that results due to rate increases.
4) Switching to another home loan provider is another decision with significant ramifications. The decision should be made considering the outstanding home loan amount and the stage of repayment. At the initial phase of any home loan repayment, EMIs largely comprise the interest component and only marginally the principal. So if one tries to shift after the first two years, it may well turn out that almost the entire principal repayment is still pending and the EMI paid for the first two years will just have to be written off. Also, after factoring in the additional administrative and processing charges, not to mention pre-payment penalty in the case of certain institutions, one may eventually find it a much costlier proposition than what had been bargained for. So don’t act in haste. Consult an expert. Discuss the issue with your chartered accountant or financial advisor and figure out if it makes sense to shift or not. Work out a cut-off limit beyond which an interest rate increase would be costlier than these items and then, only then try to switch over.
5) The ‘double-income-no-kids’ model has encouraged more and more couples in their twenties to buy their own homes instead of staying in rented accommodation or as part of a joint family. One salary takes care of the household expenses while the other goes towards the home loan EMI. Also, salary increases at regular intervals enable them to prepay part of the loan and reduce the overall tenure. On the other hand, couples who leave this essential decision for ‘afterwards’ and start off in leased accommodation often find themselves in the same condition several years later.
6) When a child is on the way, expenses shoot up drastically, incomes don’t keep up. Maintaining a high-rise career graph after the child is born becomes difficult and moreover good help, since it is hard to find, demands and gets quite a high pay packet. Add to this the sheer mental strain of finding a new home at regular intervals (not every owner extends the lease beyond two or three 11-month agreements) and the extra expense involved (the broker who arranged the deal will expect a two months commission even if you are just renewing the deal for the same place) and the prospect of financing a new home seems virtually impossible.
7) There are several instances where a person may miss out on a dream home because of a slightly lower income level denies them access to the necessary finance. What you can do, is club the income of your spouse to increase the repayment capacity. You can also take a home loan jointly with one of your siblings and get a larger home for the entire family. Alternatively, you could additionally opt for a personal loan to fund the balance amount required. But do keep in mind the fact that personal loans draw a substantially higher rate of interest than home loans, so take them only for a short tenure.
8) Importantly, a bank is eligible to demand additional security when property prices fall. Even if one is loyal in their EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security he/she may be declared a defaulter by the lender.