Wednesday, 4 June 2014

BASICS OF HOME LOANS


Once you think of buying yourself a house and go looking for that perfect dream house, only to find out that you are unable to finance your new house at the moment.And you realize that you really want that new house.You might at this point consider the option of taking a bridge loan. A bridge loan is the scenario wherein if you have enough equity in your present home, the bridge loan will allow you to avail of a loan so that you can make a down payment and buy your new house. The only catch here is that the interest rates on the bridge loan are much higher than those on the home loans.  Another thing to consider is that it is short-term loan, and there are also costs and fees involved. Therefore you might do better for yourself, if you consider applying for a home loan.The procedure is simple and of course you have to meet a certain eligibility criteria. Once you have identified the house that you want to purchase, you can go ahead and approach any financial institution dealing or disbursing home loans.

Though applying for a home loan may seem like a very difficult task, it definitely need not be that way.Given below is some Home Loan Basic that you need to know before you go about applying.The first step to getting a home loan involves filling up the application form of chosen financial institution along with the required documents.Do remember that you will need to pay a one time processing fee at this stage.You will also require some important documents to get through with the loan processing stage.  In case your are an employed individual, you will require verification of your employment form, your latest salary slip/salary certificate which outlines all deductions for at least the last 6 months. Form 16 from your employer for the last 3 years. In case you are a self employed individual, you will need a Balance Sheet and profit and loss account of the business/profession along with copies of individual income tax returns for the past 3 years as certified by a CA.

You will also need a note, which gives the information on the nature of the business, year of establishment, present bankers, form of organization, clients, suppliers etc. And of course you will need a statement proving your net worth as an applicant.Once you are past this stage you will need to submit the property documents. After getting the approval from the financial institution where you plan to borrow, the loan will be disbursed to you.

Benefits of Home Loans: You can easily avail home loan from various companies which offer home improvement loans to finance the cost of tiling, plumbing, electrical work,grills, woodwork, painting, compound walls and almost all improvements for your house.fact it must be a good idea to avail of these home loans, because they offer a number of added advantages as well.  One of the most important benefits of taking a home loan is the interest rate that is allowed on the home loan.Fixed and variable interest rate options are also available for home loans.

Many financiers also offer home improvement loans at the same interest rate as they offer the home loans.  Most of the prevailing interest rates fall in the range of 7.75% to 8.75%.There is usually processing fee of 1.00% to 2.00% also that is involved.  The other benefit of taking a home loan is the security that is to be currently being constructed as the security for the home loans.  Of course, most banks and finance companies do not finance more than 85% of the cost of the property mortgaged.Perhaps the benefit that is most used is that of the tax benefit.The interest that is paid on home loans are deductible from the annual value resulting in a lower taxable income.  For self occupied property,interest to the extent of Rs.30,000/- is  deductible from taxable income.  The maximum amount of fund that can be received through the home loans varies between 50%-100% of the total cost.

Of course the loan amount is also subject to the repayment capacity of the borrower. The usual rule states that the sum of all the monthly installments a borrower has to pay should not exceed 40%-50% of his gross monthly income. Apart from the income and margin criteria, the applicant needs to be a salaried or self-employed individual. And it is important that the loan is repaid before the retirement stage or before the person turns 65 years in case he/she is self-employed.On an average the repayment term of the home loans can be extended up to 15 years.

Home Loan Agreement: With the ongoing flurry of activity and festivity prevalent in the home loan segment of India recently, a large number of people, in the euphoria to acquire that dream house, tend to overlook some of the most important clauses in the home loan agreement. However, what they don’t realize is that these clauses have a significant bearing on wide number of areas ranging from interest rates to repayment schedules.

Some of the simple clauses of the home loan agreement regarding to simple matters, such as how often the housing finance company resets interest rates in a year can make a considerable impact on the floating rate home loans.  The norms in the industry practices suggest that interest rates for home loan consumers are reset only when the bank’s prime lending rate is changed.  Therefore it is the frequency of these resets that is really important. Some of the finance companies offer home loan agreements wherein the interest rates are reset in each quarter. Alternatively, there are other companies who do the revision only once a year. Sadly not many home loan consumers are aware of the clause related to the fixed rate home loans, which the financial companies some times insert in their home loan agreement.

This ignorance can cause the customers unintended losses in case of revision of the fixed rate home loan rates. Most of the customers are not aware that this particular fixed rate clause in the home loan agreement permits the financial institutions to change the loan’s repayment schedule and terms and conditions.

The financial institutions in a rising interest rate environment might exercise this option in order to safe guard themselves and in the interest of their own company. This move is usually not in the best interests of the customer or the home loan seeker as the modification of the repayment schedule, terms and conditions might affect the overall repayment of the consumer. The long list of terms and conditions of the home loan agreement, usually contain clauses which might possibly have a number of significant implications for the consumer and therefore it is important that the consumer is aware and makes an informed choice accordingly.

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