For those who have been eyeing a home for years, 2017 may be a good year to jump in. Home loans rate are down, as are property prices. Plus you get tax breaks. Though it may seem all banks are ready to lend, getting a loan sanctioned can be a tiring task. It is important to be aware with how home loans work to avoid any horrible surprises later.
Here are some important things you should know before signing on your home loan application.
- Home loan eligibility
- Your Loan Type
- Tax benefits on home loan
- What does the term “default” mean?
- Prepayment penalty
- Tenure of Home Loan
Home loan eligibility
A simple way to calculate your home loan eligibility is by calculating the EMI. Banks usually limit the instalments at 40-50% of the borrower’s salary that is, basic. Reimbursements and allowances are not considered for this. Besides, if you have existing liabilities, say another loan the eligibility goes down more. Apart from your financial power your profile also effects how much the bank may agree to lend. The value of the property is also considered before sanctioning the loan. Banks usually limit the loan amount up to 90% value of the property.
Your Loan Type
As you know, there are two types of home loans base on the interest rate—fixed and floating.
A fixed rate home loan charges you a fixed interest across the tenure of the loan. The interest will not change for the full time period of the loan.
The interest on the floating rate home loan changes with the market rates. When the market rates rise the interest rate on the home loan goes up. When the market rates fall the interest rate on the home loan goes down.
The fixed rate home loan charges a higher rate of interest than a floating rate home loan. Most of the home loans disbursed today is floating rate home loans.
Tenure of Home Loan
The maximum home loan tenure offer by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure if you can afford.
In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years.
So, keep tenure as short as possible.
Tax benefits on home loan
Interest payable on ‘self-occupied’ property is subject to a maximum deduction of 2 lakh under the head ‘Income from house property’. It can be set off against other income, which includes salary income, in the same year. This reduces your total tax liability. But to claim this, it is essential that the acquisition or construction is completed within 5 years from the end of the financial year in which the loan was taken; else the deduction will be limited to 30,000. Additional deduction of 50,000 for interest paid shall be allowed for first-time buyers if certain conditions are fulfilled. Booking an apartment which is under constructed is sometime cheaper. It makes tax sense to purchase the new apartment jointly – say with your spouse then each of you is entitled deduction of 2 lakh for interest funded by each of you. Click here to read about How to deduct TDS through home loan
What does the term “default” mean?
You might think ‘default’ is only if you do not pay the EMI. Though, there are some banks who define default as when the borrower expires, gets a divorce (in case of joint-loans), or the borrower is involved in any civil legal action or criminal offence.
Be careful about the add-on charges and penalties. It’s not just the interest that you pay. There are additional charges such as administrative and service charges or processing fees.
When you take a home loan, you have to repay the amount in EMI’s. You must know that the EMI you pay on your home loan is divided into 2 parts.
Your EMI (Home Loan) = EMI (principal) + EMI (Interest)
The principal part is used to repay the actual sum (amount), that you have borrowed.
The home loan is not give to you free of cost. You have to pay the bank some money, called interest; on the amount you borrowed.
In the initial years, your EMI (interest) is high and for the most part of the money you repay is interest on your loan.
You may get a bonus with your salary, or money as a gift or inheritance. You must use this money to prepay your home loan. Interest on the home loan reduces significantly, if you prepay your home loan.
Banks used to charge a penalty on prepayment of home loan, to dishearten you from making a prepayment.
Currently prepayment penalty on home loan is ended.
If you are availing a home loan from the bank, learn these facts on a home loan. Good knowledge is never wasted.
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