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Important Facts on Home Loans

It has been years since you have been searching for your dream home. You have finally found your dream home in a nice safe neighborhood with all the amenities. Be grateful for the home you have, knowing that at this moment, all you have is all you need. - Sarah Ban Breathnach

Your next job….Avail a home loan.
Remember: Learn everything possible about a home loan before availing it.

You get only 80% of house value as a home loan

When you buy a house, you can get only 80% of the cost of the house, as a home loan from the bank. You have to arrange the remaining 20% of the cost of the house yourself. You have to pay 20% of the cost of the house, as a down payment to the builder, to buy your house/apartment. If your house costs INR 10 Lakhs, a down payment of INR 2 Lakhs (20% of the cost of the house), needs to be paid to the builder. You can avail a home loan from a bank/lender for the remaining INR 8 Lakhs (80% of the value of the house). Some banks do offer even 90% of the cost of the house, as a home loan, provided the amount of home loan availed is less.

Home loans have Fixed or Floating interest rates

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 (repo rate increases), the interest rate on the home loan goes up. When the market rates fall (repo rate decreases), the interest rate on the home loan goes down.
Remember: The fixed rate home loan charges a higher rate of interest than a floating rate home loan. Most of the home loans disbursed today are floating rate home loans.

Prepayment penalty has been waived

When you avail a home loan, you have to repay the amount in EMI’s. You must be knowing that the EMI you pay on your home loan is divided into 2 parts. The principal part and the interest part.

Your EMI (Home Loan) = EMI (principal) + EMI (Interest)
The principal part is used to repay the actual sum (amount), you have borrowed. The home loan is not given to you free of cost. You have to pay the bank some money, called interest; on the amount borrowed.EMI (Interest) is this amount. In the initial years of your home loan, your EMI (interest) is high, and most of the money you repay, goes towards paying back the interest on your loan. The amount which you repay, which goes towards paying back your EMI (Principal) on the home loan, is very less. 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 drastically, if you prepay your home loan. Banks used to charge a penalty on prepayment of home loan, to discourage you from making a prepayment. Banks would lose money if you prepay the home loan. Currently prepayment penalty on home loan stands abolished.

Reset clause for fixed interest rate home loans

If you have availed a home loan under a fixed interest rate, you would expect the interest rates not to change over the tenure of the home loan. If you get a notice from your bank saying the interest rates on your home loan have been revised (say increased), you would be shocked. If you get a notice from your bank saying the interest rates on your home loan have decreased you would jump with joy. It rarely happens….
Remember: There are very few banks/lenders who will give you a home loan at a fixed rate of interest. Most of them have shifted to a floating rate of interest. The reset clause means the bank can revise the interest rates on your fixed interest rate home loan once every 2-5 years.

What does the term “default” mean?

It is popularly believed that if you do not pay the EMI’s of your home loan in time, or you do not repay your home loan, then you have defaulted on the home loan. For the bank “default on a home loan” has a completely different meaning:

  • You/Borrower expire before your home loan is repaid.
  • You/Borrower get divorced in case of a joint home loan.
  • You/Borrower are involved in a criminal offence.
  • You/Borrower cross default. You default on other loans borrowed from your bank or other banks.
  • A crash in real estate prices causes the price of your mortgaged house to fall. You have pledged your home with the bank. If its value falls, the bank could suffer. The bank would demand additional security in this case, even if you have a good credit score. If you fail to comply you would be labeled a defaulter.
    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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