Things you must know about home loans!
There are many different companies that are providing home
loans.
There are many different offers and features. How do you decide what
loan you should go in for? To help you answer that, here are a few
things you might want to consider….
Best
way to compare offers: Go to the different institutions
providing housing loans and ask them to calculate and give you the
“net” amount of money you will have to pay over
10-Yrs and
the “net” amount of money you will have to pay over
20-Yrs.
When we say “net” we mean that the money includes
everything, the administration, processing and all other possible fees.
Note all the different rates that all the different organizations
give. This will give you the best idea about the different
rates.
You will also have to choose between a 10-Yr or 20-Yr loan. A
20-Yr
loan will mean lower EMI (equal monthly installments) but probably a
higher interest rate. In the long run, you'll be paying more for your
house because you will be making more interest payments.
With a 10-year loan, the EMI will be higher but the interest
rate
lower; thus you'll pay less for your house because it will be paid off
in a shorter period of time. You will have to decide what suites your
needs.
Find out about “processing fees”,
“administration
charges” and the “quantum of loan”. Get
each
institution to provide you with a written statement of all fees. Then,
ask to reduce one or more of the fees. Use the lowest fees you to
negotiate with other institutions. (Don’t be shy. Seriously!)
You
must negotiate.
If a sales person asks you to include false information on
your
home loan application to get quick approval, do not agree to this. Also
don’t get confused into borrowing more money than you need or
can
afford.
A lot of Income Tax savings are possible with home loans. The
Income Tax saved can be used to pay the EMI. So do not loose out on the
income tax saving oppertunities.
Ideally, you should choose the bank which does not require a
"guarantor" and offers home loans without "pre-payment penalty" (or a
penalty for repaying loan before it is due). This helps you re-pay your
loan as early as possible.
The following documents will be required if you approach an institution with a home loan request. Try to take these documents along with you. If you show them that you are a serious buyer, they are more likely to be open to negotiations:
If you are a Salaried Employee:
- The latest salary slip showing statutory deductions
- Form 16 (showing tax deducted at source by employer)
- Proof of age (birth certificate/voter identity card/passport/school-leaving certificate/valid driving licence)
- Proof of residence (phone bill/electricity bill/ration card)
If you are Self-employed:
- Computation of income for the previous two years, certified by a Chartered Accountant
- Profit & Loss Account and Balance Sheet for the previous two years, certified by a Chartered Accountant
- Proof of age (birth certificate/voter identity card/passport/school-leaving certificate/valid driving licence)
- Proof of residence (phone bill/electricity bill/ration card)
Choosing "fixed" or "floating" interest rate!
Just incase you are not sure about what these mean, let us
explain
them first. A "fixed" rate would be a rate that would be set right at
the beginning when you apply for the loan. Suppose you apply for the
loan and choose a “pure fixed” rate, then if the
rate of
interest is 9% at the time of application, it will remain 9% for
the complete period of the loan.
This could be good if the interest rates increase during the period for
which you are paying the loan. This could be bad if the interest rates
reduce during the period for which you are paying the loan. But, if you
want a safe option, then you should go for this.
However, there is another version of “fixed”
interest
rates. These are “semi fixed”. This means that the
interest
rates remain the same for 3 or 5 years. And at the end of every 3 or 5
years, the interest rates are changed again. If you decide to go in for
“fixed” rates, be very clear about the kind of
“fixed” rates you are choosing.
In the case of “floating” interest rates, the
interest
rates change depending on basis of some other external interest rate.
For example, some banks decide the “floating”
interest rate
on basis of their fixed deposit interest rate. And the fixed deposit
interest rate generally depends on the market.
However, in some banks, the “floating” rate may
depend on
some "internal interest rate" that is not market dependent. This is as
good as a “fixed” interest rate. It will just give
an
impression of a “floating” rate. So, make sure you
know
what the “floating” rate is dependent on, when you
go for
it.
Now a days, some banks even allow you to split your loan amount and pay
part of it on the “fixed” and the other part on
basis of
the “floating” rate. Ask about this. Also ask
whether there
is a way to switch from “fixed” to
“floating”
interest rates in the middle of the tenure. If that is possible, you
should be constantly vigilant of changes and make switches
appropriately for getting the best rate!
Basically, the choice of “fixed” or
“floating”
rate depends on your situation and how much risk you can take.
Keep these few things in mind. If you are not clear about the procedure
of taking a loan, do not worry about that. Just go to a institution,
and tell them you want a home loan, they will be more than happy to
tell you everything you want to know!
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