Home Loan Shopping: Five Vital Caveats to Keep in Mind

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When you’re out shopping for home loan, you’ll quickly realize that there are many things to understand. You shouldn’t necessarily get carried away by the high decibel advertising that promises easy processing and maximum loan disbursement. In many ways, technology has transformed the way home loans are evaluated, applied for and sanctioned. If you get the documentation requirements right, then loans can be obtained very fast. However, you should not let the ease of getting the home loan color your judgment and rush the process and then regret it for life. Some alerts are as follows:

1. Borrow Only What You Can Repay

An extension of the old saying that cautioned us to not to live beyond our means, you should frankly evaluate your disposable income after deducting your living and other essential expenses to find out how much you can set aside every month to pay the home loan EMI. Ideally, all your debt servicing outgoes should not exceed half of your monthly income. So, you need to be extra careful if you have taken a car loan or consumer loans that need to be repaid along with your home loan. If the home loan takes up too much of your monthly income, then certain other important financial goals, such as education for your children or even for retirement, could be adversely affected.

2. Keep the Home Loan Tenor Short

If you’re young and have a long working life ahead, it can be very tempting to lower the EMI by taking a loan for 25-30 years. However, it needs to be appreciated that in the process the total housing loan interest outgo is far larger than what would have been for a shorter term. A simple calculation shows that when a loan is taken for 10 years, the interest paid is 57% of the loan amount, however, for a 20-year loan, it rockets to 128%. The figure climbs even more to 167% when the tenor is 25 years. Most lenders favor long tenors due to two reasons: the EMI being low, there’s less chance of default, and the customer also pays a lot of interest. You should settle for the shortest tenor that will allow you to pay the monthly payment without undue stress. And, use every opportunity to pay more whenever the circumstances permit it. If you raise the EMI by 5% every year a, 20-year loan can be settled in 12 years, while a 10% rise per annum will have you paying it off in just 9 years.

3. Pay Your EMIs on Time

Remember every loan that you take has an adverse impact on your credit rating. To ensure that you keep your rating as high as possible, you should always pay your EMIs on time. Missing on your EMI will also attract penalties that are worth avoiding. If you are stuck for cash in any particular month, then just pay the minimum 5% of your credit card statement and rollover the balance to the next month, however, this is a very expensive process since card issuers have very steep interest rates ranging from 24-48%.

4. Think Twice Before Taking a Loan for the Purpose of Investing

Ideally, any home loan that you take should be for a property where you will live because it can be a good way of saving on rentals and the need to move every few years. However, if you are planning to take a loan to buy a property for investment purposes, you should be very careful and ensure that you do not end up taking a loan for an asset whose market price is projected to decline, as is happening in many real estate markets all over the country. In the case of a market correction, your investment’s worth may be severely eroded and you would still have the loan riding on your back.

5. Get Adequate Insurance

When you take a loan to buy a home, it is natural to be very happy, however, you should also think about the worst-case scenario. There should never be a situation of your family losing the home to repay the loan in your absence. To prevent this from happening, you should have a life insurance cover of the equivalent amount of the loan, the proceeds of which can settle the loan and let your family retain the home without the burden of making the monthly payments. Also, make it a point to insure your home against calamities like fire, earthquakes, floods, etc. so that your investment is adequately protected.

Buying a home is invariably among the most costly investment decisions that you will ever make in your lifetime. The final decision should always be made after a prudent analysis of your income and the affordability of the asset. Under no circumstances should you expose yourself or your family to the downside of the investment.

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