October 25, 2013

Choosing the Best Home Loan

Best Home Loan
Before choosing a finance company for your home loan, you need to know:

  •    Your own credentials
  •    Finance cost and interest rates
  •    A good home loan lender who can help you through the whole loan procedure

Let’s look at some of the guidelines to choose the best home loan:

  • Check your home eligibility: When you are applying for a loan, check with various banks, as every bank has its own method and standard for calculating eligibility. Generally, it depends on the income and the repayment track record. Adding up the spouse income is a good option to increase the eligibility of the home loan. There are various factors that a finance company looks out before approving a loan:
  • Income: The income or salary determines the amount of home loan one is eligible for.
  • Duration of the loan: The longer the tenure of repayment, the more is the home loan eligibility.
  • Interest rate: If your interest rates are on a lower side, than the loan eligibility will be higher and vice versa.
  • Rate of interest: One is always left in a dilemma while opting between fixed and floating interest rate. Generally, it is assumed that fixed interest rate will be the same throughout the loan tenure, but sometimes it may change after a certain period of time. In such case, either your EMI amount or the loan tenure can increase. Hence, it is better to clarify with the finance company before choosing fixed rate of interest.
Benefits of fixed rate

Floating interest rate varies with the market condition. This rate is tied to a base rate plus a floating element. Thus, if the base rate varies the floating interest rate automatically changes.

Benefits of fixed rate:

  •     Interest rate is fixed throughout the tenure of loan period
  •     It provides sense of certainty and security

Benefits of floating rate:

  •  Floating rate is cheaper than the fixed rate.
  •  Floating rate brings a lot of savings, as the interest rate will surely fall over a period of time
  •  Calculation of home loan amount: The calculation of home loan differs in each home finance company. Some company calculates the amount on the basis of gross salary, while some calculate it on the net income. These calculations will make a difference to individuals as EMI varies based on this calculation. One can look at various banks and do a comparative analysis before choosing the best deal.
  • Prepayment and foreclosure benefit: Finance companies have certain terms and conditions on prepayment and foreclosure. Individuals should clarify such points before closing the deal:
  • What are the prepayment charges?
  • Whether there is a penalty for foreclosing of the outstanding loan amount with the lender?
  • What is the fee that is charged when transferring the loan to another bank?
  • You can opt for the loan, once you get a complete clarification on all the issues and interest rate offered.
  • Check for any hidden costs: Generally, people think that one have to pay only the interest once the loan is approved. But they forget to look at the large hidden costs that are involved when applying for loan, such as, legal charges, valuation fee, processing fee and pre-payment charges. All these fees and any other hidden cost have to be checked before a loan is availed.
  •  Processing fee: Banks always charged a processing fee from the potential customers when they apply for loan. This fee is non-refundable and is 0.5 to 1% of the total loan amount. Paying this fee doesn’t mean that the loan is approved. It may happen that you pay the processing fee, but still the loan is not sanctioned due to various reasons. Hence it is important to have a written agreement with the bank and this agreement can be utilized if one is switching from a floating interest rate to fixed interest rate and vice-versa.
banks for home loans

Some of the popular banks for home loans:
  • SBI Home Loan: This is India’s largest bank and is regarded as the best bank for its loan schemes. It is the most preferred bank in the housing industry.
  • HDFC Ltd. Home Loan: HDFC has its branches in 100 cities in India and it is the only bank that has come up with 30 year tenure for loans.
  • Axis Bank Home Loan: Axis Bank is one of the upcoming banks in the home loan category. Until now it has captured around 5-6% of the market share.
  • LIC Home Loan: This home loan is from the house of Life Insurance Corporation of India. They currently hold 11% of the market share
  • In the end, the decision is completely on the borrower, if he is interested in security and certainty, the fixed rate home loan is the best. But, in any case before applying, one must verify the details, do a comparative study and decide which one suits him the best in order to not agonize over the decision in the future.