Applying for a home loan? 5 things you must know
First time borrower of home loan? A quick checklist to get you going.
Buying a home is a dream come true for most of us. The current economic situation demands that every buyer opts for a home loan.
But choosing a right home loan product is not easy. What is more important is to know certain important terms and conditions before you sign the loan agreement with the bank. Here are those facts:
1. Understand each type of interest
There are two types interest you pay on a home loan: fixed or floating.
Fixed rate of interest does not mean fixed for entire tenure of the home. It will be fixed for a certain time frame like one to three years after which your rate of interest becomes floating, which means it will be linked to market rates.
2. Reset clause
It is clause banks introduce in your loan agreement to protect themselves in case of increase in rates in the future. This is usually found in case of fixed rate of interest. Banks usually use this as an escape route to unbind themselves in case of skyrocketing interest rate scene.
3. Security in case of property rates fall
Banks usually make provision in the agreement to demand security if property prices fall. Despite paying your EMIs on time, if you as a borrower fail to pay this security cover when a bank demands you will be termed as a defaulter.
4. Fixed vs floating rate
All home loan rates are linked to benchmark prime lending rate of the bank. So if a bank's BPLR is 13.5 per cent and if your loan agreement states that your interest will be at a discount of 1.5 per cent to BPLR, then your effect interest will be 12 per cent.
So when you are considering a fixed rate of interest and have plans to opt for floating rate later during the tenure of your loan, it is better to know how much discount you will get on the BPLR existing at that time. Ultimately, that is what will decide your effective interest.
5. Cibil Score
Do not ignore the importance your CIBIL credit score plays on your loan application. Each year home loan applications of many borrowers are denied because of their poor credit history and the borrowers are stuck in a rut because they have already put in the deposit money.
Checking your CIBIL Report and CIBIL Score is a fairly easy process. Once you are aware of your report, you can take corrective action to ensure that not only your loan application will be approved but you also will be eligible for the best rates in the market.
The author is Co-founder and Director Credit Vidya.
Photographs: Uttam Ghosh/Rediff.com