It has been years since you have been searching for your dream home. You have finally found your dream home in a nice safe neighborhood with all the amenities.
Be grateful for the home you have, knowing that at this moment, all you have is all you need.
- Sarah Ban Breathnach
Your next job….Avail a home loan.
Remember: Learn everything possible about a home loan before availing it.
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When you buy a house, you can get only 80% of the cost of the house, as a home loan from the bank. You have to arrange the remaining 20% of the cost of the house yourself.
You have to pay 20% of the cost of the house, as a down payment to the builder, to buy your house/apartment. If your house costs INR 10 Lakhs, a down payment of INR 2 Lakhs (20% of the cost of the house), needs to be paid to the builder.
You can avail a home loan from a bank/lender for the remaining INR 8 Lakhs (80% of the value of the house).
Some banks do offer even 90% of the cost of the house, as a home loan, provided the amount of home loan availed is less.
A fixed rate home loan charges you a fixed interest across the tenure of the loan. The interest will not change for the full time period of the loan.
The interest on the floating rate home loan, changes with the market rates. When the market rates rise (repo rate increases), the interest rate on the home loan goes up. When the market rates fall (repo rate decreases), the interest rate on the home loan goes down.
Remember: The fixed rate home loan charges a higher rate of interest than a floating rate home loan. Most of the home loans disbursed today are floating rate home loans.
When you avail a home loan, you have to repay the amount in EMI’s. You must be knowing that the EMI you pay on your home loan is divided into 2 parts. The principal part and the interest part.
Your EMI (Home Loan) = EMI (principal) + EMI (Interest)
The principal part is used to repay the actual sum (amount), you have borrowed.
The home loan is not given to you free of cost. You have to pay the bank some money, called interest; on the amount borrowed.EMI (Interest) is this amount.
In the initial years of your home loan, your EMI (interest) is high, and most of the money you repay, goes towards paying back the interest on your loan. The amount which you repay, which goes towards paying back your EMI (Principal) on the home loan, is very less.
You may get a bonus with your salary, or money as a gift or inheritance. You must use this money to prepay your home loan. Interest on the home loan reduces drastically, if you prepay your home loan.
Banks used to charge a penalty on prepayment of home loan, to discourage you from making a prepayment. Banks would lose money if you prepay the home loan.
Currently prepayment penalty on home loan stands abolished.
If you have availed a home loan under a fixed interest rate, you would expect the interest rates not to change over the tenure of the home loan.
If you get a notice from your bank saying the interest rates on your home loan have been revised (say increased), you would be shocked.
If you get a notice from your bank saying the interest rates on your home loan have decreased you would jump with joy.
It rarely happens…
Remember: There are very few banks/lenders who will give you a home loan at a fixed rate of interest. Most of them have shifted to a floating rate of interest.
The reset clause means the bank can revise the interest rates on your fixed interest rate home loan once every 2-5 years.
It is popularly believed that if you do not pay the EMI’s of your home loan in time, or you do not repay your home loan, then you have defaulted on the home loan.
For the bank “default on a home loan” has a completely different meaning:
If you are availing a home loan from the bank, learn these facts on a home loan. Good knowledge is never wasted.
SEE ALSO: 14 Situations In Which You Can Partially Withdraw EPF Money
Following are 11 facts which borrowers should know about Home Loans:
1. A home loan borrower has to send the Statement of Income to the lender each year.
The amount received from the employer as part of the settlement or benefit, has to be first used to settle the entire loan outstanding amount. If the amount received is insufficient to settle the loan, the unpaid amount has to be settled by the borrower in a manner decided by the lender at his sole discretion.
3. A change in the borrower’s employment position needs to be intimated to the lender, within 7 days of the change.
4. Generally, fixed rate is 1 to 2.5% higher than floating rate home loan. Interest on floating rate home loan varies according to the market conditions.
5. Banks can demand additional security in case property prices fall. Failure to meet this demand will lead to a default.
6. A borrower needs to inform the lender of any alterations or additions to the said property.
7. Letting out a property on rent or any change in the use of the property during the loan period has to be informed to the lender. Without the approval of the lender, the borrower cannot sell, let out or lease the property.
8. The lender has free access to the borrower’s property, for inspection or supervision, without needing to seek permission during the loan tenure.
9. Based on the clauses of the Home Loan agreement, the lender can change EMI and loan tenure.
10. An increase in the rate of interest means higher EMIs. The borrower might re-adjust or increase the loan tenure to bring down the EMI. But in the long run, they end up paying more.
11. A borrower not only pays interest on a Home Loan, but also additional charges such as administrative charges, service charges or processing fees.
Yes, a borrower can transfer a home loan to another lender offering a lower floating rate. But it is wise to do so if:
Some banks charge existing customers a high rate of interest and new customers are charged lower interest. Therefore, do your research well and avail the best deal.
Rising market rates force banks to increase EMIs on existing home loans.
EMI has to components - interest and principal. In the initial years, a major part of the EMI amount goes in paying interest. As the years pass, the trend reverses and the principal component increases.
If interest rates rise, banks have to increase the tenure. If this trend of rising interest rate continues, the EMI fails to cover the entire loan amount. Therefore, banks are forced to increase the EMI on existing home loans.
In a borrower finds it difficult to cope with the increase in EMIs, they can request the bank to increase the loan tenure while keeping EMIs constant. Banks do not increase the tenure beyond the retirement age (60 years for salaried people and 65 years for self-employed). Nonetheless, it is advisable not to increase the loan tenure as it will increase the interest payouts.
Also, if the borrower has extra money, he/she can pre-pay a part of the loan to keep the EMIs same. This is an excellent option as the borrower will not be charged for prepaying the loan.
The right time to buy a home is when the prices of houses are low. When prices are low, the sellers are more than buyers. This makes the market a buyer's market. Also, buyers demand additional concessions and discounts to buy a home at lower prices.
SEE ALSO: Everything About 'No Cost EMI'
When a Home Loan is taken by more than one person, it is called a joint Home Loan. The responsibility of repayment lies with all the co-applicants in equal proportions.
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