The biggest investment a borrower does in his lifetime is when he buys his dream home. It is easy to dream, easier to say but toughest to make it come true for every individual. If you follow the television commercials on home loan, you have probably noticed that the models in those commercials get so emotional while offering you easy home loans. It is indeed a matter of emotion when it comes to buy your house.
However having said that, you must know that getting loan against home is not something you can emotionally deal with. So many times that after getting the loan people get so emotional about the fact that now they will be able to build their own houses that they often miss out critical points.
Here are 5 critical points on your checklist that you should consider before going for a home loan.
- Type of Interest Rate
The first and most important thing is to consider before a home loan is the interest rate type. We often get attracted to the lower interest rate, but for the people who are opting for loan against home for the first time can get confused whether to go with fixed or floating interest rates. In case of the fixed rate the interest rate will be fixed till the end of your tenure as for example 5 – 10 years. On the contrary the floating rate of interest keeps changing as per the RBI rules and terms.
Though you can switch from fixed to float anytime and vice versa however this will cost you a fixed switch charge by your bank. If you are in no mood to bear that cost then you need to calculate which interest rate type will be better for you. At the time of your loan if you find out that interest rate is already roaming around lower segment then you should stick to fixed interest rate. If this does not happen then go with floating type, as there is a possibility of the rate going lower in future.
Another thing is if you have good credit history or you are an old customer of your bank, you can always go for interest rate negotiation. Even after banks’ rigidity on the rules and blah, you can always go in bargaining.
- Affordability of your EMI
Before taking the loan, calculate the EMI portion. You want your dream house but I am sure not at the cost of your food and daily needs. It is important to take care of the EMI amount you are going to pay every month. Rationally your EMI should not be more than 45% of your total monthly income. If you are availing other loans alongside then the percentage must be much lower, say 35% or less.
Loan against home or any other loans don’t come free. They involve many a charges and penalties by banks. If you invest large portion of your salary in the EMI you will probably get to save nothing for future.
- Tax Benefits
Get the idea of tax benefits when you avail a home loan. Generally you get full exemption of tax on interest you pay on Home Loans. But if you have plan to sell the same within 5 years of purchase then the total exempted tax will be deducted from the sale amount. Up to Rs. 150, 000/- interest amount and up to Rs. 100, 000/- principal amount does not fall in taxable periphery.
- Tenure of Repayment of the Home Loan
Before heading towards loan against home at first we compare the offers. The first offer attracts our eyes, minds and pocket is the one which offers us lower rate of interest (can be of any type). Lower interest rate means low amount of EMI that means I am required to spend little for my dream home. Fair enough. Now the point is why would the bank offer you lower interest when others are not? The reason is they have longer tenure for the loan repayment. This is definitely something to worry about. If you are paying lower rate of interest for long time that means you are paying more than what is needed for the profit of the bank.
- Home Loan Insurance
Finally another very important and critical point to be noted before a loan against home is insurance of the loan. Unfortunately if any sort of accident takes place during the loan tenure with you, your family should not be affected by that. Before heading for a loan against home make sure to consider good loan insurance from your lender/bank.