INTRODUCTION
What is good about buying homes today is that it has become possible. What with so many finance corporations just wanting to give you loans. So if you have a stable monthly income you might want to opt for a loan yourself. Here are some of the basics you should bear in mind while opting for a home loan:
• Make sure you have surveyed the market and get details from all the major finance corporations, especially look for the best interest rates available.
• When opting for a scheme, consider the long-term saving plans as well as your monthly spending plans.
• Ensure that the EMI or the equated monthly installments you are about to opt for is what you can afford to pay without much financial strain.
• It would also be prudent to work into your payback plan your expectation of an increase in salary.
ONLINE HELP FOR HOME LOANS
You need not necessarily make a myriad of phone calls and trudge down busy offices asking for information. As a net user, remember that most of the financial transactions—banking, applying for a credit card, a loan, trading in stocks---you want to do can be done on the net. Help and advice, therefore, is also just a click away. Ideally, you should just do a search for the sites through your most favored search engine. Most also have user-friendly online tools that will calculate the EMI for you, based on your requirements.
HOW MUCH CAN YOU BORROW
• Get an estimate of the amount you can borrow. You generally need to make arrangements for 15-20% of the total amount yourself.
• The financing is usually to the tune of 2-3 times the annual household income.
• Your repayment capacity is also considered. The Equated Monthly Installments (EMI) should ideally not exceed 50 % of monthly household income.
• Other than interest rates, one must also be vigilant about hidden or `loaded’ costs like administrative and processing charges, address, legal verifications, etc. One must make provision for these as it could substantially increase repayment costs.
• Freebies like waiver of last two installments, free accident cover, etc are also offered by some companies. Keep a lookout for these.
• Factors like age of property could matter, so confirm if your finance company has any predetermined norms.
• Documents such as employment certificate, salary slip, copy of I-T returns are required for loan processing.
• When in doubt of signing legal and financial documents of any kind opt for legal counseling.
READ THE FINE PRINT IN LOAN DOCUMENTS
If you are taking a loan, do read and understand the small prints in the loans offered by the organizations. Look for conditions relating to prepayment of loan, interest and penal interest on delayed payments and so on. Often there will be charges for the prepayment of loan, which may be substantial. The interest and penal interest on delayed payments are higher than the normal rate of interest. This is a paradox, you’ve to pay additionally, whether you are paying in advance or in arrears. Ask for any rebate on prompt payment of installments for repayment of loans.
While Calculating EMI…
Even if you like the sound of the interest rate, examine the EMI (Equated Monthly Installment) for the repayment tenure. Ultimately the effective interest rate depends on the reducing balance method used; i.e. the rate at which your payments are computed. Every time you make a payment, the interest you pay is calculated on balance outstanding principal.
The reducing balance can be of 4 types:
• Daily reduction: The principal is reduced every day as if you were making repayment of the principal on a daily basis.
• Monthly reduction: In this system the principal on which you pay interest reduces every month.
• Quarterly reduction: On a quarterly basis.
• Annual Reduction: The principal is reduced at the end of the year.
The more frequently the rate is calculated, the better the deal. Going by this principle, a daily reducing balance calculation is better than a monthly, which in turn is better than a quarterly and so on.
Processing Charge
On application, you will have to pay a certain charge on the amount applied for, which is calculated on the amount of loan applied for and NOT on the amount ultimately actually sanctioned! This charge varies with the lender and may be a fixed amount irrespective of the amount applied for or may be a percentage of the loan applied for. This amount, paid upfront, effectively reduces the money you get. Look for the lowest fees lenders.
Check For A Prepayment penalty
Try to locate a lender who doesn't charge a prepayment penalty because:
1) In case your financial condition improves you can get rid of your debt earlier.
2) If the interest rates fall, you can opt to replace the higher cost loan with a lower cost one.
3) While giving you the option of pre-payment, you will have to pay the entire outstanding principal; there is no flexibility offered. Therefore there is no possibility of paying a part of your loan when you have a surplus as banks do not allow it.
CONSIDER BORROWING EVEN IF YOU HAVE FUNDS
Opting for home financing can be a financial smart move, and one needn’t look at it as just an option when there is a lack of resources for funds. Here’s why:
• As housing loan is a low cost resource, it is advantageous to opt for one, even if adequate funds are available, provided they can be invested at yields higher than the cost of the housing loan. Further, availing of a housing loan will help in the legal vetting of title deeds provided by the builder.
• A house property is along-term asset acting as a hedge against inflation. If the house property is held for a minimum of 3 years and then disposed off, the profit on sale of such property will be treated as a long-term capital gain and taxed at a concessional rate of 20%. The resultant surplus on sale of such house property will be normally more than the cost of housing loan, which may be utilized for acquiring a bigger house.
REFINANCING YOUR HOUSING LOAN
Should you refinance your present housing loan? If you are lucky enough to borrow when home rates were low, definitely much lower than what is being offered in the current market, refinancing is obviously not worthy of consideration.
But if you financed your home when mortgage rates were higher, or if you have an adjustable rate loan and would like to opt for better terms, then you might want to consider refinancing your housing loan. The following tips might just help you decide:
• Refinancing can be worthwhile if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safety margin when balancing the costs of refinancing a mortgage against the savings.
• Do not look for quick-fix solutions though. Remember, it takes up to three years to fully realize the savings from a lower interest rate given the costs of the refinancing, but it could still be worth it in the long run.
• If you are in requirement of liquid funds, say for investing in a new business, or for your children’s education, then you can opt for refinancing and draw on the equity built up in your house to get cash.
You might want to consult a housing loan company for further details.
TYPES OF LOANS:
1)HOME LOANS
a) Purchase
b) Construction
c) Extension Loan
d) Improvement Loan
2) HOME EQUITY LOANS - Against Residential and commercial properties
3) COMMERCIAL LOANS
a) Purchase
b) Construction
4) LAND PURCHASE
5) SPECIAL SCHEMES FOR TRANSPORTERS
6) ESTATE PURCHASE LOANS
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DOCUMENTS REQUIRED - IN
GENERAL
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Salaried
Individuals
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Self-
Employed individuals
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NRI Individuals
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Latest two salary slips or
salary certificate
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Last 3 years income Tax returns
with computation duly certified by CA
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Passport copy
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Form NO. 16, PF
statement/appointment letter in case of cash salary
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Business profile on letter head of the
company
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Visa copy
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Passport size photograph
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Bank statement for the
last six months
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Latest 3 months salary slips
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Age proof and ID
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Passport size photograph
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6 months updated Bank statements (
Both international & Domestic A/c)
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Bank statement/pass book copy for last 3-6
months
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Age proof and ID
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Continuous discharge certificate (Only
for the applicants employed with merchant Navy)
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Any other documents, as may be required
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Any other supporting document
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Work permit/ identity
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