Taking a home loan is a tricky task. Initially, it may appear that a lot of banks are willing to lend, but eventually getting your housing loan sanctioned can be an arduous task. Thus, in case you want to avoid unpleasant surprises later on, then make sure that you are well acquainted with the various checks and balances that make a mortgage work. Before you sign on the loan document you should be aware of the various less apparent clauses and understand their impact on your application. The following are a few of the secrets that your real estate agent won’t tell you.
It is your choice – Fixed or Floating Rate
After you have decided to apply for a home loan, one question that may perplex you is whether to opt for a fixed rate or a floating rate of interest. Opting for fixed rate housing loan will allow you to clearly plan your budget as the EMI payable will remain the same over the loan tenure. On the other hand when you decide on a floating rate of interest, you will benefit from the currently low interest rates mainly as a result of RBI rate cuts and the implementation of the MCLR regime.
In case of floating rate the customer’s monthly installment will ether increase or decrease depending on the change in MCLR. Due to RBI’s rate cuts over the past couple of years, banks can afford to lend at cheaper rates, therefore, floating rate loans have become considerably cheaper. Opting for a fixed rate loan may be a sensible thing to do if you want to insulate yourself from market volatility. On the other hand, floating rate would help you get the greatest benefit from your housing loan.
Your choice of interest rate (floating or fixed) also affects the penalty associated with foreclosure of a home loan. The current RBI mandate states that banks cannot charge a foreclosure penalty in case of a floating rate. Thus when you consider the benefits of lower interest rate and zero foreclosure charges, a floating rate mortgage should definitely feel like the better option. Now think of this – would your realtor ever tell you this?
Fixed Rates Are Also Liable to Change
In case you still decide on availing the fixed rate home loan, make sure that you are aware about the “force majeure” clause. This standard clause is in fact present in almost all commercial contracts and refers to action that can be taken in case of exceptional circumstances. A careful scrutiny of the loan document may reveal that the home loan company has the right to “unfix” and raise the interest rates under some exceptional circumstances.
If you come across this clause, it is advised that you reassess the options of a home loan provider. It is important to remember that the “force majeure” clause gives housing finance firms the authority to change the fixed interest rates in unusual circumstances and such changes almost always end up in an increase of the applicable interest rate. In most cases differentiating between normal circumstances and “exceptional circumstances” is not an easy task. Hence do not be misled by the term “fixed rate” as these rates are in fact subject to periodic change.
You do have a simple solution in such cases – get a new lender by initiating a home loan balance transfer. If you successfully manage to complete this, you will end up saving quite a bit and your current home loan provider might even try and retain your business by providing you better terms such as a lower interest rate.
Let’s give an example of how you can save through a balance transfer
Ashish took a home loan for Rs. 50 lakhs 5 years ago at 11% for a 20 year tenure. The following are his savings in case he transfers to new lender and gets a 9.5% rate on the balance loan principal.
Current EMI that Ashish pays is Rs. 57,607.
Home loan balance remaining at the end of the 5th year is a little over Rs. 46 lakhs.
The new EMI would be Rs. 48,306.
Savings per month = Rs. 9000 (approx.)
So potential savings over a 15 year or 180 months = Rs. 16 lakhs (approximately)
A Home Loan does not cover all the Charges
A home loan only covers approximately 80% of the total property cost. The remaining 20%, usually equal to the down payment amount has to be borne by you. This significant detail is over glossed over by the average real estate agent. Further, you may not be aware of the additional fees and charges which you may have to pay when you apply for a loan.
One of the most common of these is the MODT charges or the Memorandum of Deposit of Title Deed. As a borrower you will have to submit the title documents of the property to the lender in order to secure your home loan. The government levies stamp duty on this document to register it and give it legal validity. These charges vary across states and even municipal areas though they normally range from 1% to 2% of the value of the property. Apart from the MODT charges, you may have to pay additional documentation fees, surveyor charges, etc. to the bank before you can get your new house financed. What your realtor may not mention is the fact that some of these charges are not covered by your bank’s loan and you may have to pay out of your pocket.
You Credit Score Can Make or Break the deal
Your realtor may never highlight the importance of your credit score in securing a housing loan. Maintaining a good credit score is important for approval of your home loan. On the face of it, credit score is pretty simple – a three digit number, which reflects your history of dealing with credit i.e. either loans or credit cards. A score near 900 is considered high and the lender will have faith in your capacity to repay the loan. If you have a good credit score your loan application will be processed faster and you might be offered a preferred (lower) rate of interest on the loan sanctioned to you.
Each bank has its own credit score cut-off for accepting or rejecting loan applications. In case you have had problems in the past such as defaults or multiple late payments that have led to a dip in your credit score, you can easily bolster your chances by getting an immediate family member (parents, adult children etc.) with high credit score to cosign your application. An application with a co-signor shows an improved chance of repayment by the applicant and your chances of being approved for the home loan increase dramatically.
Conclusion
In conclusion it is important to reiterate that buying a new house and by extension getting a home loan is serious business, so make sure you do your homework before committing yourself fully. It is imperative that you have a thorough understanding of the procedures and intricacies of a housing loan before you apply for one. Last but not the least make sure you get help from all available sources in case you have issues understanding any of the features and details of your loan agreement. Taking these pains early on would definitely help you make an informed decision before you sign on the dotted line.
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