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How to pick the right home loan
May 20, 2004 15:10 IST
Last Updated: May 20, 2004 18:48 IST
One of the biggest attractions of investment in property is the fact that it is relatively easy to gear the purchase: that is, to use someone else's money to cover most of the purchase cost.
Lenders are happy because their loans are secured by bricks and mortar assets and, for the borrower there is always the chance of a quick gain from rising property prices.
So if you are planning to buy a home loan there is some homework you need to do before going in for the deal.
5 steps to picking the right loan:
The housing loan market at present is going through a phase where you need to do lot's of market research before opting for a loan. You should never get carried away by advertisements that offer you loans at 7 per cent or 7.75 per cent interest rate. The other terms and conditions like special interest rates for fixed tenure, hidden terms and conditions often come later.
But you should always opt for the bank that that offers you the lowest EMI (equated monthly installments).
1. Gather data on interest rates
Get interest rate information from more than one source, and get the same information from each so you can compare the offers. You will also have to choose between a 10-year or 20-year loan. A 20-year loan will mean lower EMI, but probably a higher interest rate.
In the long run, you'll be paying more for your house because you will be making more interest payments. With a 10-year loan, the EMI will be higher but the interest rate lower; thus you'll pay less for your house because it will be paid off in a shorter period of time.
Consider this: a 0.25 per cent (25 basis points) additional charge on an Rs 20 lakh (Rs 2 million) loan with 20-year tenure means that additional payments of more than Rs 75,000 over the tenure of the loan.
The other factors like whether to take a fixed or a floating interest rate loan can also affect your total outflows. Play lenders against each other for the best rates.
You should explore employer-lender tie-ups for discount rates. Also check out deals at property fairs and loan melas.
2. Find about fees
Next, find out about processing fees, administration charges and the quantum of loan. Have each lender provide you with a written statement of all fees connected to the loan.
Then, ask each to reduce one or more of the fees. Use the lowest amount of fees to negotiate with the other lenders to see if they'll reduce their fees.
3. Get a pre-approval letter
This gives you substantial leverage. Sellers immediately see you as a serious buyer. Not only will you know the exact price range you can afford, you'll be able to negotiate a better deal and move faster when you see a house you like.
For pre-approval, you will have to furnish the necessary income documents to the bank. After verification and preliminary checks, the bank issues a letter agreeing to finance you a certain amount. This letter will help you bargain with builders or sellers.
Sellers too are more comfortable once they know you are serious about buying. Try and get pre-approval from three or four financiers, as interest rates change regularly. Pre-approval also saves time since the rudimentary paperwork is already covered.
4. Negotiate your loan
Most lenders will reduce their printed rates for customers with a good credit record, so don't be shy about bargaining. A bargain deal will easily fetch a home loan at around 25-50 basis points (0.25-0.5 per cent) lower than official rates.
Home loan rates depend on a number of factors like general economic conditions, liquidity position in the money markets and the lender's cost of funds.
At any point in time, these factors remaining unchanged, you will always get a better deal if you negotiate. Besides, competitive pressure has already reduced effective rates below the official rates or 'rack rates.'
Once you get what you think are the best terms possible, ask for a written rate lock. It will include the interest rate, how long the lock-in will last and the number of points to be paid.
A lock-in protects you from a rate increase if rates go up during the time your loan is being processed.
5. Watch out for predatory lending Don't play along with a sales person who asks you to include false information on your home loan application to get quick approval. Also don't get pressured into borrowing more money than you need or can afford. If you get new numbers or new terms at the closing, ask for an explanation.
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