Buying a house is indeed one of the most important decision in one’s life. A lot goes into planning before one is able to arrive at this significant decision. Choosing the area to live and type of property that one would like to own may take considerable evaluation. Given that the funds required for owning the property may vary from one area to the other and even the type of property that would fulfil the need would impact the cost, closing out on one can be a daunting task.
People also spend considerable time to choose the housing finance company from where they would want to take the loan. Rate of interest being the single most important criteria apart from the legal and processing cost, people most of the time miss out on another important factor that can have significant impact on the loan. This is the term or tenure of loan.
Following are the reasons that make the loan term an important factor to be considered before one signs on the loan agreement.
Impacts cost of property
Rather unfortunate but still a majority of house buyers only consider the amount paid to the seller to be actual cost of the property. Fact is that the interest being paid on the loan is also a charge and must be added to the overall cost of the house. And the important point to ponder upon is that the longer the loan term, the higher the interest getting paid on the borrowed amount.
As per industry statistics, the average home loan term being actually served is 10 years as against the original average term of 20 years. This means that on an average the home loans are getting pre-paid in half of the actual term. The important point is that the EMIs set off a miniscule amount of principal amount in initial years. The longer the term the lower the set off against the principal. Therefore it becomes important for one to decide on the term carefully. One must not opt for a longer term if he has the capacity to pay a higher EMI.
Impacts cash flows
A home loan is a high ticket and long term commitment. The term of loan will have a direct impact on both the quantum and number of EMIs, one has to be cautious in selecting the term. While the banks and lending institutions, as a thumb rule, extend loans till 50% of the available monthly income, they may not be privy to the actual living costs and or other expenses like medical need of a senior citizen, a hand loan that would have been taken in an exigency and is still pending to be paid off completely. Then there could be other expenses like the rent and upkeep of the house that one is staying in. One must consider the actual expenses and then decide on the term of loans.
What you also need to remember is that any default on the repayment of a home loan can severely impact your credit profile and can potentially lead to you looking for a loan for low CIBIL score. Goes without saying that such loans not only come at a high price point but are also difficult to get.
Tax exemptions available on the home loans are also a big consideration. Now one may think how is this of any consequence to the term of loan? Please consider this, you have been serving the ICICI home loan over last few years and have not calculated the exact bifurcation of the principal and interest being paid for the financial year. The benefit is restricted to an amount of 1.5 Lakh under 80CC on the principal amount that you pay and a deduction of 2 Lakh on the interest paid on the loan. As the EMIs continue to be paid, the equilibrium may get disturbed. You should consider the term again and can have it adjusted again to avail these tax sops. The flexibility to change EMI amount and term is of great benefit if availed properly.
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