A home loan, or mortgage, is a loan taken to buy or replace a home. It enables you to continue making payments for your home for a long period, often for 15 or 30 years. In a home loan, you will pay a certain amount of money over time to the borrowed amount along with the interest in contrast to paying for the entire worth of the house in one go.
What is Home Loan Home loan enables people to purchase a residential property such as an apartment, house, villa and the like without the need to pay for the price in cash. It is a financial transaction between a borrower and a bank or any other financial institution where the former will repay the borrowed amount along with some interest in equal monthly installments over a stipulated period. The asset acquired is pledged with the financier until the particular debt is entirely paid off. In the event the borrower fails to honor the repayment terms, the lender has the right to sell the property to recover the balance amount of the loan.
Types of Home Loans Today, there are many kinds of home loans as a way of addressing various borrowing requirements.
The popular ones include:
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Home Purchase Loan – This is also known as mortgage loans, which is the most popular kind of home financing. The amount of loan that is given depends on the borrower’s profile, salary or wage, value of the property etc.
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Home Construction Loan – If you want to construct your home, you can take this type of loan and pay the builder in tranches linked to construction milestones. The disbursement of the loan is in proportion to the progress made in construction.
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Home Extension Loan – This loan enables anyone to construct an extension or addition to the existing home such as the construction of a new room, floor, among others, and the loan amount will cater for the cost of construction.
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Home Improvement Loan – Minor alterations, major changes or repairs on the current home can be undertaken through this loan to improve the quality of life. The loan amount can be used to redecorate a kitchen, a bathroom, or any other area of the house.
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Land Purchase Loan – This loan is useful if you intend to buy the land where you want to put up your house in the future. It will include the expenses of the registration and the purchase of the land.
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Balance Transfer Home Loan – This type of loan allows you to shift your existing home loan to a new bank or financial institution you get better terms or a lower interest rate. The process is known as balance transfer where the loan balance is shifted.
Home Loan Eligibility Home loan eligibility factors include income, employment history, credit score, repayment ability, age etc.
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Income – Most of the lenders will expect your monthly income to be sufficient to enable you to pay for the loan in terms of EMIs for the agreed period. Most apply the eligibility formula of 60 times your monthly income.
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Age – According to the lenders, home loans are provided to the individuals of the age between 23 and 65 having a regular income. Age is taken into consideration because you should have several working years left to be able to repay the long tenure loan.
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Employment – Stability of employment and income sources for the last two to three years is generally taken into consideration to determine the repayment capacity of the borrower. Individuals using services could be self employed and they may need to produce income tax returns, bank statements and others.
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Credit score – A credit score above 750 shows that you have been repaying the credit obligations adequately. This increases your likelihood of obtaining home loans with more favorable conditions.
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Down payment - They require at least 20% down payment toward the purchase of the property. Where the down payment is higher, this demonstrates repayment commitment and hence a lower loan amount is needed.
Home Loan Interest Rates This is a big factor that determines your EMI and the total interest payable over the loan period of 15-30 years. The two main types of interest rates offered are:The two main types of interest rates offered are:
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Fixed Rate – This means that the interest rate remains constant throughout the duration of the loan as when the loan was taken. It provides a surety of the instalments payable monthly for the purpose of the EMIs. While the interest rates in the market may vary, your EMI remains constant every month.
- Floating Rate – In this case, the rate of interest is not fixed and varies with the general market trends and RBI policies. These will be revised every few months in a bid to correspond to the new rates associated with the benchmark. Although payments are cheaper initially compared to other modes of payment, they can also go high in future if rates goes up.
Interest rate charges vary depending on your credit history, type of property, loan amount, tenure and more of the property etc. It is recommended that you compare home loan rates offered by different banks and NBFCs before you apply. Selecting longer tenures that go up to 30 years minimizes EMI but maximizes total interest paid over the loan period. Thus, consider both parameters while deciding upon the tenure and your repayment capacity.
Application Process After comparing the home loan options and finalizing the lender, the next step is applying for the loan.
The key steps are:
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Keep documents such as KYC and Income proof to be attached with the loan application form.
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A processing fee is required to conduct credit checks and assessment of eligibility by the intended lender.
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Analysis of property documents and examining the valuation report from a legal and technical standpoint.
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Approval-in-principle that shows how much you can borrow
- Payment of loan amount to property seller after the paperwork is complete
In conclusion, home loan helps make home ownership possible by enabling purchase through affordable EMIs that span 15-30 years. Evaluate your needs, compare the offers of different lenders and apply to the one that meets your demands. When repaid within the agreed period, you develop an asset and equity while dwelling in your own home.
