For a generation striving for an independent lifestyle, a house of one’s own is the biggest achievement. We’d like to give a big “BOOO!” to the rapidly rising real estate rates, though, because it’s the biggest obstacle in the race to success.
So what can a person looking to have a place to call their own do? Forever stay in the “potential homeowner” category? Let the “dream house” stay a pipe dream?
Now you might be wondering… “What’s with all the angst?” Well, there’s a deep set problem in the economy and I’m mad about it! The average Joe’s income is not nearly enough to just “buy a house”. Most houses cost many times more than the average homeowner’s annual income.
Don’t get too flustered about it, though. Where there are money problems, there are money solutions. The solution to this money problem comes in the form of the financial product called loans. Home loans to be precise.
But how does one go about picking the most feasible option for them? How? How? Calm down. Today’s article will educate you with the ins and outs of the home loan world.
What is a Home Loan?
Before we get to home loans, let’s understand loans first. Simply put, a loan is a borrowing from a bank or another institute that is in the business of providing loans and other borrowings. Loans are usually taken by individuals and organisations to fulfil the difference between their current financial position and their future financial goals.
Loans can be secured or unsecured. A secured loan has an asset serving as a failsafe for the lender. In case the borrower fails to pay back the borrowed amount, the asset, also called the security or collateral, is transfered from the borrower to the lender. The lender can use the security to realise the unpaid borrowed amount. Unsecured loans are provided without this security.
Loans are usually unsecured when the amount borrowed is not significant and the risk to the lender is not high. A home loan is no small borrowing by any stretch of imagination, thus they are secured like a car or 2-wheeler loan.
But when it comes to buying a home and availing a home loan for the same, most individuals do not have significant assets to call their own that can serve as a security. So, what gives? How can an individual get said home loan?
When it comes to home, car and 2-wheeler loans, the asset being purchased with the loan, doubles up as the security for the same.
This means that if the borrower fails in repayment of the loan, the car, 2-wheeler or house gets seized by the lender. This seized property is then utilised by the borrower to recover the money lent by them.
A credit score is the first step of eligibility a bank checks before providing a loan. Though various banks have their own benchmarks, a score above 750 is considered very good. (Works like first impressions.)
Before you apply for a home loan, clear all your prior dues and take steps to improve your credit score. Having a good credit score will give you an upper hand to negotiate on the terms of the loan. So, buck up, pal!
Tenure of the loan
The tenure of the loans offered by banks can stretch up to 30 years. Grrr! That’s a bit much, the interest for such long-term loans would also be unbearable. The ideal tenure one can opt for is 10 years but it may not be generalized. If the borrowed amount is too high and the individual's income does not suffice, shorter-term loans could be super harsh on the pocket.
The type and rate of interest are among the major factors influencing one's decision. While the floating rates are flexible and fluctuate with changes in the market and monetary policies, the fixed rates are predetermined and as the name suggests, fixed.
We recommend a flexible rate system as it is slightly lower, but you MUST take care of the market conditions. Comparing the loans offered is also vital so that you choose the one with the lowest interest rate.
The principal and interests are not the only costs one incurs while borrowing a home loan. Other costs include processing fees, administrative charges and others. Some of these are even exclusive to certain lenders. Though the interest rate charged is lower, these additional charges add up and can substantially increase your total cost of borrowing. (Stingy tactics!)
Sometimes, these lenders do not inform the customers about these charges. So, you must inquire about these charges and make an informed decision. Websites like Paisa Bazaar and BankBazaar come in handy at such times.
Downpayment and EMI
Banks offer various types of EMIs. It is at the discretion of the borrower to choose what fits his pocket the best. (Finally, some flexibility!) Multiple EMI calculators are available online that would help you calculate the accurate amount of your cash outflow at the end of every period. Of course, once you pay the downpayment, the remaining would be considered for the EMI. Higher the down payment, lower would be the EMI. Easy Peasy!
Did you know that you can pay-off the entire loan before the term expires and improve your credit score? Well, it might sound like the best thing to do and it surely is. Previously, there was a penalty levied if you repaid your borrowings early (Weird rules). But now, it has been scrapped.
Do read the foreclosure policy of the lender to be fully aware of the benefits and consequences. Also, try and reduce your general expenses during this period, as they could be of huge help to repay the loan before the term ends.
Terms and conditions
This is another very important factor to consider before you sign a loan agreement. It helps one get a clarity on what they're really getting into. Certain terms and clauses are specific to certain institutions.
Sometimes, the T&Cs may not be explicitly conveyed and if they’re provided, it is assumed that the individual has read and understood the details. In case of a dispute in the future, the bank or the lender cannot be held liable for facts mentioned in the T&C that the customer was not aware of. Sounds plausible. So read up well!
Get your Debt Diagnosis
Now that you know of all the things you need to be aware of when getting a home loan, one last thing that should come to your mind is affordability. And I’m not talking about the house right now, I’m talking about the loan itself.
Whether the loan you take is your first one, your only one, or one of the few or many you have, it’ll definitely put your financial stability to the test. Based on your financial standing, could an additional loan get your finances in trouble? How deep in debt are you already?
Find out the answer to these burning debt questions with the Debt Diagnosis and many more personal finance related queries on Recipe by Finology.
Home loan is a huge commitment which requires a lot of changes to be made in your personal financial planning in order to sail through comfortably. Also, you must make sure to determine the right time to avail a home loan. It would depend on your income level, age and other financial and non-financial commitments.
There’s definitely a high chance for individuals to get caught in the debt trap, and needless to say, lenders do enjoy it to some extent (Sadists.) Therefore, let’s all be mindful and do our part of the research before making such a huge decision.
This is not a comprehensive list of all the factors to consider while taking a home loan. But we have included a few of the most important ones. Remember, you must take care of the market conditions and choose the most suitable loan for you.