Buying a home is an big deal anywhere, and for anyone. More so in India, where buying a house is no less than a life time achievement award one confers upon one self, it connotes settlement, responsibility, being well planned and a whole lot of other virtues. Whether it is that, or just a sense of ownership you want, given the fact that a Home Loan comes with tax incentives, most home buyers would opt for a home loan.
While the situation is more consumer centric now, with banks and NBFI thronging the prospective home loan borrower, by the dozen everyday, the consumer is spoilt for choice.
You have made the smart decision to buy choosing after careful consideration, a home in premium Gated community flats in Hyderabad, so it makes sense you be smart even when you take the home loan decision.
The internet is flooded with information and options that can help weigh teh pros and cons between the product every bank/financial institution offers.
We demystify the loan in general, and certain moot points that you have to keep in mind irrespective of the lender.
Maximum loan amount vs minimum down payment:
Banks and FIs fund your loan up to 80-90% depending on the total project cost. The dilemma most home buyers have, and arguably right is should I opt for a maximum loan or should I make the maximum down payment possible and opt for only loan as required.
While maximizing the loan amount would mean lesser amount that you need to pitch in from your own funds or savings, it would also mean as a whole you would end up paying more interest - because, more loan equals more interest.
On the other hand, minimizing the loan amount would either mean you need to look at sweeping your savings entirely (please note the reference is for first time home buyers specifically), or taking soft loans from near and dear. Breaking those fixed deposits, gold loans, or selling those precious shares are all part of this plan.
While most advise columns would give you the details, and stress on "what suits your financial position", remember - it is a consumer centric world. Do the math - take the maximum loan, and though you EMI will contribute largely to interest in the first two years, keep paying lump-sum amounts towards the principal as and when you can. There are also a few nationalized bank's which offer the flexibility of a Home Loan overdraft or Home loan advantage, where you will pay interest only on a certain portion of the loan. Do your homework carefully, and work it to your advantage.
Ask, ask and ask - diminishing balances
With a whole sector of banking dedicated to young professionals, and dedicated centers being set up by FIs to source home loans for Premium apartments in Hyderabad, marketing stakes are high. Always remember the golden rule - they may market whatever they want to, but look beyond it. A home loan is a long duration loan, and you don't want any surprises when you think you have finished paying your loan after 15 or 20 years, but the Bank sends an due letter.
The bank will cater to your demands before you sign and execute the documents - insist on a detailed amortization schedule - a snapshot of how the repayment of the loan is expected to be over your stipulated loan period. While the EMI is fixed, you interest should diminish, and principal should increase. Also, the net principal balance should decrease every month.
Estimations gone wrong:
It's always better to be safe than sorry. When it comes to home buying, and taking a loan, being conservative does not hurt. Sorry if it sounds harsh, but do not assume you will have a consistent 20% hike every year. Calculate everything carefully at present prices only, because it's simple - your income increases every year, but so will inflation, and expenditure. The verdict - do not bite off more than you can chew.
If you get increments and bonuses, well congratulations! Remember what we discussed in the first point - pre pay your loan and insist making it towards the principal portion only. Finish off your loan, and stay debt free.
It is prudent to keep your loan documents well organised. While the financial institution will not sanction a loan without proper documentation, do not procrastinate when it comes to keeping a personal set. Request the bank for a copy of the entire set of documents - legal documents executed, sanction letter, link documents, originals submitted, and a letter that confirms the deposit of such and such documents for securing your home loan. Trust me, it will make your job easier later. Whether you keep a soft copy of all these, or a hard copy of them safe somewhere - just keep them.
Avoiding risk insurance:
No, it isn't another marketing gimmick to fund the Banker's overseas trip, or help him meet his insurance target. We are talking about risk insurances only - where in case of any unforeseen event, your loan will be taken care of. Remember, just like your legal heirs inherit your assets, they will inherit your liabilities too. And since the tenure of the loan is so long, it makes sense covering the loan.
So, keep all these in mind before you sign the home loan documents, and thank us later!