Buying a home is probably one of the most important personal financial decisions you will make during your lifetime. What kind of loan to take is an equally significant decision as it has an impact on your life for decades, given the long repayment period of most home loans.
One of the main factors when deciding on a home loan is the interest you will pay over the entire tenure of the loan. The interest you pay the lender is basically how much it will cost you to take the loan.
Interest rates change with government policy and according to each individual lender’s policies. It is best to check for the latest and most accurate interest rates on the lender’s website. In general, however, interest rates on home loans range from 10-13% in the market, but of course, this number can change depending on your individual credit situation and other many other factors. Also some loans offer special interest rates - for instance the Her Ghar loan offered by SBI offers lower interest rates for women applicants.
You can calculate the cost of your loan by using an EMI calculator that is freely found on the web or alternatively, on the lender’s website. It is a mathematical formula. You need to only input your intended loan amount, tenure and interest rate to see how much you will be paying in terms of interest over the entire course of your loan period.
What are the different kinds of interest rates on a home loan?
There are two basic types of interest rates and you need to study all the interest rate options carefully before deciding which one to choose:
Fixed rate: You pay one fixed interest rate for the entire tenure of your loan and you have a fixed EMI for the entire duration of the loan. The amount you pay every month is the same.
Floating rate: The interest rate you pay varies during your loan tenure, depending on external market conditions. You would choose this option if you are confident that interest rates will go down during your loan period.
There is also the option of a partially fixed and partially floating rate. You need to learn about all the options or consult a professional to see which option suits your needs the best.
If, at a later date, you feel that you want to change from a floating interest rate to a fixed interest rate on your loan, most banks allow you to do so, on the payment of a fee.
What is EMI?
EMI stands for Equated Monthly Instalment. It is the amount you need to pay on a monthly basis to repay your entire loan. It consists of principal (the loan amount) plus interest due, spread over the entire tenure of your loan. If your loan period is 20 years, then you will be paying an EMI every month for 20 years (20x12=96 months).
If your EMI burden is too high, you can reduce it by lengthening the tenure of the loan. However, if you extend the tenure of your loan, you will be paying out more in interest amount since your repayment obligation is over a longer period.
A few tips when you apply for a home loan:
1. Obtain a copy of your credit report and check your credit score well in advance of applying for a home loan. If your score is high, you stand a good chance of being offered an attractive interest rate. If your score is low, yor application might be turned down, or you might be given a higher interest rate. It is a good idea to improve your score to 750 so that you can avail of the lowest interest rates on your loan.
2. Before you apply for a home loan, you should do a little homework to check whether you are capable of repaying back the loan amount you borrow. This depends on various factors such as your monthly expenses, your current salary and net monthly income, your credit score and other loan obligations.
3. Do not choose a property that is too expensive for your current income level. Your loan application might be rejected.
4. Research the various home loan products and compare the costs and benefits before making a decision. Your home loan has a significant impact on your financial life so do not rush into any decision.