Choosing a home loan is a frightening task |
Posted: May 4, 2017 |
Being a long term investment, banks always access repayment risk before approving a home loan. So, getting a home loan can be a Herculean’s task for those who have a red flag in their credit information report. Understand the agreement and its various clauses Reset Clause on Fixed Rates: Reset clause is a tricky clause used by banks. It allows them to increase interest rates in case of highly volatile markets. This eventually converts your fixed rate loans into floating rate during high rate market. So read about this clause carefully before signing the deal. Force Majeure Clause: This is another clause that allows the lender to make your fixed interest rate variable in exceptional circumstances. The definition of loan ‘fault’ for a bank may be different from the borrower’s version. So you should always know when your lender would term the loan at fault. Generally it is easy to assume only non-payment of an EMI during the tenure would bring you to a fault. However, a bank may flag you red when one of the borrowers expires, get divorced or involved in any legal battle during the tenure. Another clause to pay attention to is security cover. There is a clause that allows banks to demand additional security at times of falling property rates. The interest rate is not just floating or a fixed rate. There are other clauses attached to them. The loan rates are linked to the Benchmark Prime Lending Rate (BPLR) of a bank. So with increase in BPLR you loan rate is also increased. Whether you are looking for loans for bad credit account or with a moderate credit history, choosing a home loan is not easy. You should ask as many questions to the banker as you want. Besides knowing about loan tenure, interest rate and loan amount, there are too many factors you need to know about: Know your loan eligibility and repaying capacity. Based on your monthly disposable income your loan eligibility is determined. The difference between your monthly total income (including stability of job and spouse’s income) and monthly expenses including liabilities and bills, is termed as your surplus income that can be used to pay for next loan EMI. Instead, it is advisable to make maximum down payment possible and save on the interest cost. If you go for longer duration loans that simply means you are buying a more expensive loan. So availing a 30 years loan should never be your goal. The sooner you pay, the better it would be for you. What is the real cost of loan? The cost of home loan is more than the total of principal amount and interest paid. There are several costs involved in the process and you should know about them in advance. b). Prepayment Penalty: Being a long term loan it is always advisable to get rid of home loan as soon as possible. However some banks levy a prepayment penalty if you opt for repayment in the middle of loan term. So always check this clause before you apply for the loan. c). Conversion Fee: When there is a low rate environment, you would like to switch to less costly option and convert your fixed loan to floating rate of interest. Some banks charge conversion fee. So you should also check the clause.
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