One might think that banks are eager to lend, but getting a home loan is actually easier said than done. Like with any other financial product, you have to be familiar with home loans to avoid any unpleasant surprises down the road. To choose the best home loan for you, here’s what you should know before signing any papers.
Calculate Your Loan Eligibility
Various factors affect your eligibility, but they can all be solved by calculating your EMI. It’s important to know that banks usually limit your installments at 40-50% of your salary, which can affect your eligibility. Another thing that will make a difference is other liabilities (like another loan) as they will lower your eligibility for sure. A higher number of dependents implies lower repayment capacity for banks.
Your profile also affects whether a bank will approve or not. For instance, future homeowners with stable income will get a loan much easier than self-employed people with unstable earnings. Your age also affects your repayment capacity. Usually, loan terms don’t go beyond one’s retirement age (unless you have a co-applicant of more eligible age).
Choose Your Loan Type
Home loans are divided into two categories when it comes to the interest rate—fixed and floating. Fixed-rate loans have one interest rate that doesn’t change as the market fluctuates. This rate is usually 1-2.5 percentage points higher than the floating interest loan that varies according to the market conditions.
Check Additional Features
Sure, interest rates, fees, deposit and repayment amounts are the most important thing to keep an eye on when choosing a mortgage, but there are other features in a home loan to consider. You also have to look whether the loan includes an offset account, a redraw facility (more common outside the U.S.), ability to make extra repayments and lump sum repayments, and ability to split the loan or get a home loan pre-approval. But, by all means, focus on the interest rate and whether or not you’re paying a competitive rate.
To choose the best loan for you, you have to search wide and long for a deal that fits your lifestyle and situation. Since you probably don’t have time to spend days on your computer making spreadsheets of different loans, you can simply find a home loan comparison tool and compare, select and settle using an online platform. This tool will identify which lenders match your unique situation and locate the best rate that’s right for you. If you don’t have a lot of experience in finance and banking, this tool can be a lifesaver.
Read the Fine Print
Like any other legal documents, a home loan agreement can often be incomprehensible for normal people, with one or two tricks hiding up its sleeve. For instance, most banks consider ‘default’ if you don’t pay the EMI, but others define default as when the borrower dies, gets a divorce while in a joint-loan or gets involved in a criminal offense. Additionally, some banks use a security clause that allows the bank to ask for additional security with your loan amount if property prices decrease (if you fail to make these payments, you can be marked as a defaulter).
Add-on charges and penalties must also be paid—it’s not only your interest. There are administrative and service charges, processing fees, prepayment of the loan penalties and others, so consider them when comparing home loans.
Negotiate the Rate
No matter which home loan option you choose, just know that you can always negotiate the rate. Of course, the bank will have the upper hand, but you can haggle, especially if you have a long relationship with the bank. Do you always make your payments on time and have a clean credit history? You can use this to negotiate loan amounts and the interest rate. What you’re offering to the bank is good business, so use your high credit score to your advantage. Also, traditionally, it’s cheaper to purchase your loan at the end of the month since banks usually have monthly targets so they are more willing to bend instead of losing business.
You Can Switch Lenders
When you take a loan from a bank, you don’t have to stick with them forever. Depending on the situation, you can always switch to another lender. Most banks no longer even have any prepayment penalties, so you only have a processing fee to handle as an additional cost. This can also be negotiated (or at least ask about reductions).
Selecting a home loan, or even a relocation home loan is a very personal choice, so even if some extra features make your loan more expensive, you always need to weigh all your options and decide what’s best for you.
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We hope you found this blog post Important Steps to Follow When Deciding on a Home Loan useful. Be sure to check out our post How to Avoid Two Mortgages After Buying a New Home for more great tips!
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