Applying for Home Loan - 5 Things to Consider

Applying for a home loan is a convenient way to get the funds for buying your dream home. Since getting a home is a big financial decision, there are certain important things that you must consider. Read on to know more.After much consideration, are you willing to buy a new house? Congratulations! The next obvious step is to look for the best home loan offer. When you search for the best loan offer online, it may seem that there are plenty of lenders that are eager to sanction the loan. But, remember, getting a home loan is easier said than done. It requires careful consideration.Just like any other financial product, you must do your research well about it to avoid any nasty surprises later. If you are a first-time home loan applicant here are a few important home loan things to consider.

The credit score is one of the important factors that lenders consider while approving the home loan. So, it is vital to maintain a good credit score before applying for a loan. Generally, most lenders in India have a minimum credit score requirement, which varies from lender to lender.Maintaining a high credit score is not difficult. You can easily maintain the score by making timely payments or your credit cards bills and other dues (if any).

While comparing the home loan offers from different lenders, you must check the interest rate. It has a direct impact on EMI and affordability. Generally, the lenders offer two types of interest rate – fixed and floating.In a fixed home loan interest rate, the interest remains fixed throughout the loan tenure. In the floating home loan interest rate, the interest fluctuates based on the base lending rate fixed by the Reserve Bank of India and other economic factors. However, you must know that the EMI amount remains unchanged.Many first-time home loan borrowers believe that it is better to opt for a fixed rate home loan. The truth is that the floating interest rate is a better choice as it tends to be cheaper in the long-run.

When you avail of a home loan, apart from the interest rate, there are other costs that you must bear. And, one of the most significant expenses is the processing fee. The lenders charge about 0.5 - 1% of the home loan amount sanctioned as a processing fee. And it is a mandatory fee.So, while comparing the home loan offers, it is vital to check the processing fee and other costs involved and choose a lender with the lowest processing fee.

Another critical home loan things to consider is tenure. You must be careful while choosing the tenure as it directly affects the EMI. You may feel tempted to choose a home loan with a maximum tenure (Which is usually 30 years) so that the EMI is affordable. But, you must know, the higher the tenure, the higher the interest rate payout, and vice-versa.On the other hand, if you opt for a home loan with shorter tenure, the EMI would be high. But, the overall interest payment will be less. It is paramount that you assess your finances carefully, determine the maximum amount you can afford to pay as EMI and choose the tenure accordingly.

Many first-time home loan borrowers do not pay much attention to the foreclosure terms while signing the papers. But, it is a vital factor to consider. Foreclosure of a home loan means repaying the amount before the end of actual tenure. The sooner you repay the full amount, the lesser interest you pay.You can either prepay a part of the home loan amount or pay the full amount and close the home loan account. However, the lenders usually levy a prepayment or foreclosure penalty, which can be up to 1% of the amount you prepay.If you have availed home loan with a floating interest rate, the lenders cannot levy prepayment charges as per the RBI (Reserve Bank of India) mandate. But, if you are availed fixed interest rate home loan, the prepayment charges will be applicable. So, while comparing the home loan offers, choose a lender that has the lowest prepayment charges.

The key to getting the best home loan offer is to do your homework well and equip yourself with as much knowledge as possible about different aspects of the loan. This will help you make an informed borrowing decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.