Five common mistakes to avoid while taking a home loan
One of the largest financial decisions a person will ever make is purchasing a home. Therefore, it’s crucial to take your time making decisions. You can choose better if you are aware of the following errors that frequently make while applying for a home loan:
Overstretching one’s budget
People frequently jump on the bandwagon to purchase a home without being financially prepared for it; This may be due to the Joneses effect. The majority of banks demand a minimum 20% down payment on the purchase of the home. But that doesn’t mean you shouldn’t increase your savings. As much as possible, try to accumulate 40% or more because it will simply reduce your financial obligations. Continue saving until you reach your goal.
Housing finance businesses extend loan terms to lower consumers’ EMIs. Some positions have a 30-year term. However, it is not financially prudent to seek a tenure of more than 15 years.
For instance, the EMI for a loan of Rs. 50 lakh at a rate of 7% is Rs. 58,054 for a loan of 10 years, Rs. 44,941 for a loan of 15 years, and Rs. 38,765 for a loan of 20 years. Only Rs. 35,339 and Rs. 33,265 are left after 25 and 30 years, respectively. Beyond 15 years, the EMI declines sub-optimally for each additional five years of borrowing.
Lastly, make sure your mortgage is paid off. EMI cannot exceed 35% of your gross income.
Because you assume all of the risk associated with the economy’s interest rate swings, floating-rate loans are typically less expensive than fixed interest rates (or at least partially fixed ones). So, if interest rates rise, be ready for loan terms to be extended.
Falling for teaser rates
Lenders occasionally try to entice customers by offering loans with incredibly low-interest rates. It frequently applies just to the first few years; After that, the rates are increased or linked to rates determined by the market. Or it might just apply to women borrowers or small loans.
Investigate further to see if the interest rates are truly inexpensive for you. Additionally, you need to account for other expenses like processing and admin fees, legal costs, conversion fees, prepayment fees, and so forth. It might effectively raise your borrowing costs.
Because you assume all of the risk associated with the economy’s interest rate swings, floating rate interest loans are typically less expensive than fixed rates (or at least partially fixed rates). So, if interest rates rise, be ready for loan terms to be extended.
Not providing for a contingency
Boost your emergency money before applying for a house loan. If the standard rule of thumb is to have up to six months’ worth of costs on hand, increase that to up to twelve months. Make sure to get a life or health insurance if you haven’t already. If you pass away, life insurance will ensure that your loved ones won’t be saddled with debt. Any medical emergency might deplete your finances and put you in a vulnerable position. Take appropriate health insurance, then.
Additionally, be cautious and wait for conditions to calm before making any financial commitments during these epidemic periods.
Overlooking credit score
The majority of banks base loans on your credit rating. Lower interest rates are associated with higher credit scores.
Go over your credit report, look for any errors, and have the credit rating agency fix them as soon as possible. Pay off your debt if it’s a lot, including high-interest personal and auto loans. Maintain a total credit ratio of no more than 30%. Over time, doing all of this will raise your credit score. Additionally, watch out for missed credit card or EMI payment deadlines, which could negatively affect your credit score.
Not negotiating enough
With lenders, there is always some room for negotiation, especially if your credit score is high. They are willing to waive processing or other costs or reduce interest rates by a few basis points. Therefore, do not be afraid to request a discount on these loans.
Similar to this, you might later think about a balance transfer in which you move your existing house loan from one bank to another with a cheaper interest rate.
Verify the house’s affordability from your point of view. In these times, exercise the essential caution and safety.