Buying a home of your own is easily one of the best financial decisions that you will make in your life. After all, it makes sense to pay home loan EMIs rather than rent that won’t amount to anything in the end. That said, home loans can be quite tricky, especially if it’s your first one.
If you are planning to get a home loan, then the following are some of the key secrets that you need to know:
1. Home Loan Interest Rate Formats
A home loan can be obtained with either of the following types of interest rates:
As the name suggests, a fixed interest rate remains the same throughout your loan’s term. However, a floating interest rate aka variable interest rate can change during the term as it’s affected by marketing changes. In other words, it can either decrease or increase depending on the financial forces affecting the prices in the market.
While a fixed rate is safer, a floating rate can actually be cost-effective. This is because past records show that those who choose the floating rate end up paying less than those who choose the fixed rate.
2. LTV Ratio
If you are looking to get the full amount of your soon-to-be home in the form of a loan, then you will be disappointed. This is because banks don’t generally approve a loan that matches the full property cost. Instead, they consider an LTV ratio which stands for loan-to-value ratio.
The LTV ratio determines the loan amount that you get. For instance, if your bank is offering an LTV ratio of 70%, and the cost of the house is Rs. 50 lakhs, then you will get only Rs. 35 lakhs as a loan. The rest of the money you will have to arrange yourself.
3. Interest Rate and Cibil Score
When was the last time you checked your free cibil score? If it’s been a while, then it’s strongly recommended that you check it again before you apply for home loan. This is because the interest rate you get is highly affected by your credit rating. If your rating is good, then you can get a lower rate than what the bank is offering to others which is certainly a huge advantage.
4. Hidden Charges
When obtaining any type of loan, you have to be careful about hidden charges that your bank may not inform you about. Some of these are as follows:
5. Prepayment Fine
No matter how good of a deal you get with a loan, it’s essentially a financial burden because it comes with a home loan interest rate. This is the extra money you pay on top of the original i.e. principal amount. This is the reason why all borrowers try to repay the loan amount sooner if they are able to arrange the funds (by acquiring heritage, business growth, etc.). However, the problem is that some banks charge a prepayment fine if you repay the loan before the term is supposed to end. So, make sure that you inquire about this before you get the loan.
6. Joint Loans
If you check your free credit score and find it to be below average, then you may face a lot of challenges in getting a loan. However, you can make the process easier by getting a joint loan instead. For instance, if your spouse has a high score, then by taking the loan with them, you can greatly improve your chances of loan approval.
7. Tax Benefits
Section 80C of the Income Tax Act grants tax benefits to the borrowers of home loans in India. You can deduct up to Rs. 1.5 lakhs from your taxable income for the amount paid towards loan’s principal amount. Similarly, you can deduct up to Rs. 50,000 for the amount paid towards the interest.
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