How to choose a housing loan?

A lot many of us know this one, mostly after a painful experience in some way or other. This are few tidbits that I've learnt thru my own experience and thru my friends' experience.

  • After you have decided on the house/apartment, check whether any banks have approved the project. If a bank has it approved then your paper work becomes much easier with that bank.

  • Period of loan plays a very important role. There is no very big difference in EMI for a 20 year loan and 10 year loan. It would be ~ Rs 100 per 1L. So if you are taking a loan for 10L, a 10 year loan will result in Rs 9000 EMI and 20 year loan will result in Rs 10000 EMI. The trade-off is between paying a little high every month for 10 years or paying less for 20 years. In any case, as a rule of thumb, make sure your EMI doesn't cross 40% of your take-home pay.

  • The choice between interest types - floating/fixed is always confusing for many. The floating interest rate went all the way to 7% few years back and now its back to 11%. Whether it will decrease/increase in the next 20 years is hard to predict. Also the fixed is not really fixed. The banks can change that rate also. Some banks allow switching between these two. Many banks offer a combination of two - fixed for first 5 years and floating for the rest of the period. Look for these options

  • Not all of the banks will give you the whole amount. You have to bring in around 10-20% and the bank will lend the rest. However, you can find some deals with the banks for lending the whole amount. If you don't have cash for the down payment and not very keen in opting for a personal loan, this might be a good deal. The penalty of taking 100% loan is the interest rate will be a little higher (but will be definitely less than the personal loan's interest rate)

  • Processing fee is another charge that you have to pay. It ranges from a fixed amount of Rs 5,000 to 2% of the property value. In some loan mela or exhibitions or some festive offers, banks usually levy off this fee. That means you can negotiate for the same during other time as well. Talk :-)

  • Till the construction is over, you need to pay a Pre-EMI. Remember this Pre-EMI doesn't include any principal amount. So if your construction takes 2 years, all two years, you will be paying only interest and not a single Re for your principal. There are two alternatives for this. One is that you can pay as Tranche EMI, which includes the principal amount also. This is applicable for only the amount that has been disbursed to the builder. The second option is to start the EMI right from the first month. In both cases, the principal amount repaid cannot be used to reduce your tax. Many banks allow you to change the scheme for a nominal charge/free of cost.

  • Be cautious about part-prepayment. Say you get a bonus of 2L and you wish to pay it towards your home loan so your monthly EMI burden comes down. After you have paid the amount you may not see any change in the EMI. This might be because many banks take the part-prepayment into account only in the end of the quarter. If you think that is bad, some schemes in ICICI bank do at the end of the financial year! That means if you pay 2L on Jun 07, that is no use of you till Apr 08. On the nice side, most of the schemes in SBI does it on the very same day you paid the amount.  You will have restrictions like you can't pay more than half of your principal left, the minimum amount should be more than 3 EMI, you can pay only once in an year and so on. On top of it all, they might also charge you a part-prepayment penalty. Its usually less than 5%, but on which the % is calculated sometimes differs. Few banks will charge that percentage on the amount you pay and few on the whole amount. Double check that before opting for a loan. For all schemes in HDFC (not HDFC Bank, its HDFC) its 0%!

Know any more suggestions? Leave a comment.

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