How To Select The Right Home Loan: A Checklist

The Buyt Desk

home loan is for 15-20 years and is a long-term financial commitment. So do not make any mistake while selecting a home loan else you will lose both money and peace.

Buying a house and making it a home is everyone’s dream. Taking a home loan to fulfil this big purchase is very common. This loan is a long term commitment of around 15-20 years. Choosing the right home loan is very essential as its a long term commitment. There are many things that you should consider while selecting the lender and home loan plan. Firstly, know the different aspects of the loan. Here are a few guidelines that will help you choose a home loan.

Parameters and concepts to distinguish while selecting your Home Loan

Processing charges/fee – For processing the loan application, a fee is collected from the borrower. Also the borrower should bear the cost of assessing property value and verification on borrower details. This fee is usually 0.25% – 1% of loan amount when the borrower is self-employed and if salaried, Rs 2000 – Rs 10000 is charged.
Rate of Interest – Along with the principal loan component, the interest is added to the EMI (equated monthly installment) which you will be paying every month. The interest keeps reducing as the outstanding principal amount decreases after every EMI payment. The rate of interest depends on your balance sheet numbers and credit score. It can be as low as 6.5% per annum if your books are good.
Pre-approved loan quote – Much before you hunt for property get pre-approved home loan status so that processing the loan gets easier. The bank verifies the borrower’s background and repayment capacity. Based on this a loan amount is decided and this may change once the property is finalized. Having this quote in hand will make it easy for you to decide your budget and also easy for sellers to get money from the bank.
Maximum Loan Amount – The approved loan amount depends on the property value and your balance sheet score. Based on repayment capacity and mortgaged property worth, the loan amount is decided. Loan amount can be anywhere between 60% – 80% of the property value.
Prepayment charges – Floating rate home loans do not have prepayment charges. But the fixed rate home loans have prepayment charges when you want to make full repayment before the tenure ends.
What the Market is offering – Check all lenders in the market to know what each one is offering in home loan. Compare their rates and fees along with terms and conditions. This can be done online as there are many websites which will give a comparison result. But do not apply for loans at multiple lenders. The more loan enquiries will dent your credit score as it shows your credit hunger.

How to select a Home Loan?

Firstly check for the interest rate, loan tenure and your lender’s goodwill. Here are a few steps that will help to make decisions.

Fixed vs Floating interest rates – When offered interest rates are high it is better to opt for a floating rate loan. But when offered interest rates are lower it is advisable to opt for fixed interest rates. Always remember that the fixed interest rates are 1% – 2% higher than floating rates. Borrowers should be smart enough to make the choice considering the market situations and long term plan.
An Overdraft account can be opted for – To minimize the interest cost, the loan account can function as an overdraft account. Even though the rate of interest of an overdraft loan account is marginally higher than home loans, it will be profitable for borrowers who generate surplus funds from time to time. This excess amount when in loan account, interest paid reduces. Also the borrower can use the funds anytime.
Choose optimal loan tenure – You might feel that longer loan tenure will lessen your burden by reducing your EMI but at the end of tenure the amount you paid as interest will be really high. If you have good fund flow, go for a smaller loan tenure. Always choose a tenure that is more affordable.
Insurance cover is must – Always cover the risk of liabilities including home loan. You can purchase the home loan cover from your lender or independently. By doing so, you will safeguard your family from the burden of outstanding home loan amounts.
Longer loan tenure can be opted – Go for the longest tenure when you apply for a home loan as it gets the maximum loan amount. And gradually when your fund flow increases, increase your repayment amount too. Go for partial or complete repayment options when affordable and hence you can reduce the interest amount you pay throughout the tenure.
External benchmark – Opt for lenders who link the repo rate as external benchmark rather than market driven external benchmark. Repo rate is more stable so will be the loan interest rates.
Beyond financial parameters – Go for a lender who gives good post-disbursal service and have all services online. Choose the lender who attends to customer grievances quickly and act upon them. Also the lender should proactively inform the borrower of even the minute changes that happen. The lender should be easily accessible either through mails or calls. Look through the customer reviews to understand the working pattern of the lenders.