For most people a home loan will be the biggest and most important loan they will ever go for in their entire life. It is something that will affect their personal finances for decades.
While competition is making banks jump over each other to lend you that much-needed home loan, it is always better on your part to know a few basic things before you sign on the dotted lines.
Hence, it's important to make the right decisions when you approach a bank for a home loan to buy your dream house. Here are some important things to watch out for:
Look carefully and bargain hard
In today's environment there are many banks competing hard in the home loan business. Make sure you use the competition to your benefit. Investigate at least five banks carefully before making your final decision.
Remember that a little bit of effort today could save you many thousands of rupees over the next few decades. Imagine how happy you will feel when the same money will come in handy for your child's education.
When you do make your final decision make sure you bargain hard. In addition to bargaining on interest rates and processing fees see if you can obtain free extras like property insurance.
Finally make sure you read the fine print on the loan agreement and if necessary consult a lawyer to explain some of the details.
Loan eligibility
One of the biggest issues when taking a loan is the size of the loan you are eligible for.
Loan eligibility is calculated based on your ability to pay and the cost of the house. There are a number of ways you can increase your loan eligibility.
For instance you may choose longer loan tenure in return for higher eligibility. You may request the bank to club the incomes of close relatives like your spouse or parents.
Or perhaps you may be able to persuade the bank/s to increase eligibility by showing your track record on a previous loan or your credit card payment history.
Home loans and insurance
Home loans increase the financial risk to the family in case the main earner passes away. They will be forced to bear the burden of repaying the rest of the loan. It's a good idea to increase your life insurance cover to protect your family from the additional risk.
It is possible to buy policies where the cover reduces as the outstanding loan goes down.
You may also want to buy disability cover to protect against accidents or critical illness.
Documentation
Make sure you get a receipt for any property documents that you keep with the bank. This is important if you switch your loan to another bank and will also prove useful if your bank misplaces any of your documents.
Also make sure that your bank provides a detailed statement of account; this will be useful in documenting your repayment record, which will help you while negotiating for future loans.
Fixed and variable rates
With a fixed rate you should check whether the rate is fixed for the entire tenure of the loan or just the first few years. Check whether there are any loopholes that would allow banks to change 'fixed' rates when interest rates in general start moving up.
Many banks insert a 'reset clause' in your home loan agreement that allows them to increase interest rates at a given point in time.
With variable rates you should understand whether the variable rate is clearly linked to some specific index.
You should also clearly understand how changing interest rates would affect your payments: whether the bank will change EMI or the remaining tenure of your loan.