A home loan helps us meet one of our most important life goals – owning our own dream home. Over time, buying a home has become easier due to several home loan options in the market, falling interest rates and government schemes aimed at ‘Housing for all’. However, taking a home loan is one of the biggest financial commitments one makes, due to the high amount involved. Repaying a home loan usually takes 10 to 30 years, and hence, should be taken after careful evaluation of all factors.
Before applying for a home loan, you should always check your CIBIL Score online. You can check your credit report instantly and for absolutely free on websites like Paisabazaar.com, which can also help you avail the best home loan offers. Though, not all banks and financial institutions link home loan with credit score, it is still important to check as a poor Credit Score can severely impact your home loan eligibility.
However, the most important factor before you apply for a home loan is to calculate your equated monthly installments (EMIs). Ideally, your home loan EMI is the first thing that you should calculate to gauge the monthly financial burden that comes with a home loan and how you will manage it with your regular expenses.
You can use online home loan EMI calculator to estimate the amount of monthly payment that you will be making to the lender. To improve your home loan eligibility, you should ensure that your home loan EMI is not more than 40% of your monthly income and there are no other existing EMIs that are significant. Also, factor in all your regular expenses and the fact that they are likely to go up with time, when you are calculating your home loan EMI to ensure your financial life is not adversely impacted due to the home loan.
It is important to remember and factor in that your home loan may undergo change over the course of loan tenure depending on the various factors that have direct influence on your home loan EMI. Here are some factors that can influence your home loan EMI.
Change in Interest Rate
Any kind of change in your home loan interest rate during the tenure can have a positive or negative impact on your EMI. If you have taken home loan with floating interest rates then there will be changes in your EMI depending on the prevalent lending rates in the market. This means, every time the Reserve Bank of India makes changes in bank rates, your EMI will be affected.
However, this does not imply that taking home loan on floating rate is risky or makes fixed home loan interest rates any better. In fact, in the recent years, home loan interest rates have gone down due to rate cuts by the Reserve Bank of India. Most advisors suggest borrowers to go for floating rates as they do not involve pre-payment penalties. Also, not all lenders offer fixed home loan interest rate and even with the fixed rate, your interest rate does not remain fixed for your entire loan tenure.
In case increase in interest rate makes it difficult for you to make EMI payments, you can request your lender to make amends in your loan tenure.
Change in Loan Tenure
Even the slightest change in your home loan tenure can impact your monthly equated installment. The basic principle says that, the longer the tenure, the lower will be your EMI and vice versa. But, one thing that people often overlook here is that the longer tenure will come with higher interest payment, which will eventually lead to increase in your credit cost. This means that while the EMIs may be lower if you take a higher loan tenure, you would end up paying a bigger amount in the long run.
Pre-Payment of Home Loan Principal Amount
In most cases, the home loan lender will allow the borrower to make pre-payments for the home loan. This in turn brings down the principal amount and also lessens the interest burden on you. However, the lender may charge you a percentage of your outstanding principal as a pre-payment penalty, which usually ranges from 1 to 5 percent.
It is highly advisable to check the pre-payment clauses with your lender before you sign on the dotted line of home loan agreement. You should try and negotiate with your lender to bring down the pre-payment penalty to as little as possible.
Step-Up or Step-Down Repayment
As a home loan borrower, you may get to choose between different housing loan repayment options, which are based on the inflow of your income. The first option is that of step-up home loan repayment. This option is considered for those who have just started their career and are presumed to see increase in income as they gain more experience. Under this, your EMI will go up with time.
The other option is of step-down payment, which is convenient for those who are close to their retirement. Here, you start with EMIs of high amounts and gradually pay lesser with time.
Shifting Loan to Different Lender
You may have taken a home loan from the most-suited lender, but it is critical to keep a tab on interest rates being offered by others during the loan tenure. Home loan borrowers can change their lender to avail a lower interest rate benefit through a home loan balance transfer. However, before opting for the balance transfer, ensure that the savings you will make by switching lenders in the form of lower EMIs is considerably higher than the cost involved in transferring the loan.
Hence there can be several factors which may impact your EMI during the tenure of your home loan. This makes it critical to factor in an increase in EMIs in the future when you opt for a home loan. Carefully compare all home loan offers available to you before making a final decision.
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