Home Loan is a loan given to a person to help him in buying a house.You cannot think of buying a home without a home loan in the current market conditions. Home Loan will help you in reducing your tax liability along with creating an asset. You must be careful in going for a home loan because, it can create problems for you at a later stage. Given below are some areas, where you have to be careful.
Home Loan-7 Tips for Beginners
1. You should decide the loan amount based on your repayment capacity, though the lender may be ready to offer you more. Please make sure that the Equated Monthly Installment (EMI) is within 40% of your net salary. This is because; you have to provide for other financial goals in life, along with repayment of home loan. It is better to go for insurance cover equal to the loan amount. This will make sure, your legal heirs will continue to stay in the house in case of your untimely death before the home loan is fully repaid.
2. If the value of the property is above Rs.20 Lakhs, you can get up to 80% of the value of the property as loan. It is 90%, if the value is less than Rs.20 Lakhs. So you should plan for the remaining 20% or 10% as the down payment. If possible, avoid other costly loans along with home loan to arrange for the down payment. It is better to save for 3- 5 years and accumulate enough for the down payment. You can invest in debt mutual funds, balanced funds or bank RDs for accumulating money for down payment.
3. Floating Rate Loans are now popular with customers. But be ready for any change in interest rates. If the interest rate goes up as in 2011, you will find it difficult to pay the higher EMI. Let us see how it affects you:-
In the case of a home loan of Rs.20 Lakhs given at the rate of 8.5% for a 20 year term, the EMI works out to Rs.17,356. If the interest rate is increased by 1% to 9.5% after 1 year, you have 2 options. Pay the increased EMI of Rs.18599 for the balance 19 years or pay the same EMI of Rs.17,356 for a further period of 57 months. You will stand to benefit, if you go for higher EMI instead of extending the duration of loan.
4. If your wife is also a tax payer, it is advisable to go for a joint home loan, because she can also claim deduction up to Rs.1.5 Lakhs in a year.
5. RBI and National Housing Bank have instructed all banks and housing finance companies to stop charging penal interest on pre closure of home loan under Floating Rates. It is better to pre close the home loan and make your home debt free. But don’t discontinue your investment towards other goals like retirement, children`s education to pre close the home loan.
6. Earlier, home loans were based on Prime Lending Rate of the banks. Now home loans are based on the Base Rate, which is more transparent. Banks allow existing customers to opt for the new structure by charging a small fee. You have to do a cost benefit analysis before applying for this. Switching home loan to a new bank will be beneficial in some cases.
7. If you are taking a home loan from your relatives or friends, you cannot claim the tax benefits under Section 80C for the principal repayment, but you can still claim tax benefits for the interest paid on the loan.
While applying for a home loan, please keep the above points in mind to avoid future complications.