Availing Home Loans is not a hard task nowadays and it is very easy. Attractive advertisements highlighting fabulous home loan offers from Bankers tempt people to go for home loans. The cumbersome process of home loans has now made easy and simplified and there is no necessity to run pillar to post to get approval for home loans. Nevertheless, the eligibility criteria are also rationalized and anyone can plan to avail a home loan by fulfilling the bottom lines. Of course by availing any type of loan is a debt trap.
The EMI (equated monthly installment), as a thumb rule, on home loan should not exceed by 40 per cent of your net monthly income. Net income is meant by the disposable income left after all statutory deductions like insurance premium, income tax, PF contributions, and other obligations towards mutual fund SIP (Systematic Investment Plans) etc. For example, if the monthly income is Rs 20,000 and net income comes to Rs. 15,000, the monthly home loan installment should not exceed Rs 6,000 (40% of Rs 15,000). The rest is assumed towards your routine expenditure. However, it is suggested that, though 40% is a standard, it is always better to keep it below 25% of the present net income. The reason being is to have reserves to meet some unforeseen situations. It may be healthcare or financial affairs or any unexpected expenses under the sun.
Most of the people project hike in their incomes for future and make decisions based upon estimations. It’s good to be positive. But they may enter into troubled waters in case things move in opposite direction. Home loan is a long term liability, usually between 10-20 years. In this period, the income may keep on rising but so do the liabilities and expenses. Suppose it is expected that an increase in the present monthly income of Rs 20,000 to Rs 30,000 a year after, then, plan your EMI as per present income only. Later when the projections turn into reality, EMI can be reworked. or invest the additions into other prolific investment options. This way the liabilities can be balanced and at the same time remain stress-free on spiraling burden of EMI, which could form in case of failing estimations.
Once availing the home loan is decided, the next thing is to look for the different interest rates offered by different bankers. Normally when fixed rate of interest is selected, it is assumed that rate the rate of interest will remain unchanged over the entire tenure of the repayment period irrespective of any subsequent increase in the same. But actually this is not the case. Bankers always have a Force Majuro Clause by which there is a provision to change the fixed interest rates whenever needed. Floating interest rates are changed at regular intervals say three months or six months, whereas, fixed interest rates are changed only after a long interval and based on careful consideration of the situation warranting the change in fixed interest rates.
When you decide to get a home loan, there are a number of costs that are involved. If you are fortunate, the seller of the home may agree to cover some of the expenses for you. Some of the expenses you will see when getting a home loan is the closing costs, prepaid items, and loan discount fees. Understanding these terms will make purchasing your next home easier.
The closing costs are the expenses that the lender will charge borrowers for a new home. While some of these fees may be a part of your loan application, others may involve the appraisal of the home. The lender may also charge you fees to process your application. All of these fees are placed together in what is called the closing costs. The borrower is likely to pay these costs, and they average about 3% of the total amount borrowed. Each state will have various costs that are different from other states.
To get information about these fees, you will want to check local lenders. Loan discount fees are interest that is prepaid. They are measured in points, and one discount point is the equivalent of one percent of the amount that is borrowed. You will have to pay it at the closing, and it will be charged to the borrower as interest. Discount points are good because they help lower the interest on the amount of money you borrow. You may not have to pay discount points, but sometimes sellers will offer discount points.
The last expense you will see is prepaid items. Most lenders will require you to setup an escrow account prior to giving you a loan. An escrow account is basically a savings account that is held by the lender. You will be required to deposit a sum of money into the account each month. The money that is placed in this account will be applied to such things as insurance and property taxes. When it is time to make payments for your expenses, the lender will use the money in the escrow account to make payments.
Most lenders today require you to setup an escrow account prior to purchasing your home. It will need to have enough money to cover a few months worth of payments toward taxes and insurance. Homeowners will also have the pay the insurance policy for the first full year. All of these expenses combined are called prepaid items. The cost of these fees will vary from state to state.
These costs should be included in the price that you will pay for your home. If you don't take them into consideration, you could find yourself short of the money you need at the closing. Many of these fees are necessary for the lender, and you will have to pay them. Getting a home loan is a financial procedure that you should take seriously. You don't want to end up in a situation where you default on your payments. Understanding the costs involved with a home loan will allow you to make better decisions.
Being able to have your own home is a great feeling. Despite this, many people go out and get home loans or mortgages without taking the time to look at the cost involved. They often end up in situations that put them in a great financial strain. By taking the time to educate yourself and learn the terms involved with getting a home loan, you can make financial decisions that can improve your life. While getting a home loan can help you, it is important to research your options carefully.
Both Daniel Spivey & Joe Kenny are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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