October 30, 2013

12 Tips to Choose the Best Home Loan

Buying a home is one of the most important investments for most of us. There are a lot of banks offering home loans to construct a house which can be paid back using Equated Monthly Installments (EMI).  One can easily avail a home loan but the trick is to find the best loan that is flexible and beneficial. Here are a few tips that can help you choose the right home loan.

mortgage broker

1.    Finalize your property beforehand

The first step in applying for a home loan is to finalize the type of your property. It can be a self-constructed house, a ready to move-in house or a property under construction. Each bank will offer loan for a particular type of property. Once you have finalized, narrow down the banks that offer loan for your preferred property type.

2.    Look in to the loan eligibility criteria

The home loan eligibility criteria are generally based on the income and the repayment track record of an individual. If a bank offers low amount, try different banks which can offer maximum sum. In the current trend, you can easily avail a home loan if you opt for a maximum tenure.

3.    Choose the best interest rate

Choose the best interest rate

The interest rates are usually fixed or floating. If you choose floating, the interest rates are either calculated on monthly basis or daily basis. It is wise to choose the floating rates calculated on daily basis. This will help you save more money. So before applying for the loan, ensure if the lender’s floating rates have come down over the past 2 years.

4.    Compare the interest rates

It is necessary to compare the interest rates available by different lenders. To get better visibility on the true cost of the loan, check the comparison rate. The comparison rate includes the interest rate offered by the lender along with the fees and charges related and provide a percentage which will be more than the interest rates advertised. You can calculate the true cost and compare it with other lenders’ loan value.

5.    Understand the whole package

If a lender offers a low interest rate, there are chances that the loan might have a higher fee amount. Most banks offer only 80% of the budget, but if a bank offers you 100%, then there are possibilities for higher interest rates and processing fee. Thus, it is necessary to understand the whole package structure before applying for the home loan.

6.    Check for hidden costs

The actual rates will differ from the advertised rates, so read the loan documents carefully and get to know the hidden costs which generally include legal charges, valuation fees, pre-payment charges etc. You can check for a home loan that has zero moving charges.

7.    Ask about the processing fee

The banks collect the processing fee for any loan application which is non-refundable. This fee is usually 0.5% to 1.0% from the total loan amount and it doesn’t assure the loan approval. This amount is used to verify the documents and to complete the formalities for the home loan. The processing fee is tax deductible and thus you can enquire if your lender can provide a certificate regarding the fees payable in order to claim the deductions.

8.    Consider lock-in period

The lock-in period is the time frame of your home loan’s full settlement period. This usually varies from 3 to 5 years. You can negotiate on this and ask for a lesser term of 3 years.

9.    Early settlement penalty

Usually banks have a prepayment penalty clause in their loan offers to compensate the loss of interest due to early settlement. The penalty charges vary for different lenders and usually charged around 3% from the loan amount or the outstanding balance.

10.    MRTA availability

The Mortgage Reducing Term Assurance (MRTA) also called as Mortgage life Insurance, as it will help the borrower to settle the loan in case of any mishap. The lender will always provide the MRTA but you can also use your existing life insurance cover.

11.    Redraw facility

Redraw facility is an option where a borrower can make additional repayments to the loan account. This way, the borrower can save on the interest rate and will also have the flexibility to access the fund when required. Some banks offer this facility with an activation cost. If your lender provides this facility, then it is an added advantage.

12.    Consult with a mortgage broker

Asking questions to the lender about the loan is the best way to avail a beneficial home loan. A mortgage broker has the knowledge to ask the right questions to the lender. You can also use the help of the internet to understand, compare and avail the best home loan.