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Do you aspire to purchase a house? Are you depending upon a bank or housing finance company to fund your needs? Is the same rate of interest charged by two different lenders confusing you? You are at the right place.
If two lenders charge exactly the same rate of interest, how do you decide where to borrow from? There are many other factors that you would have to consider before plunging in the act of financing home mortgage.
In spite of two lending institutions offering a loan at an identical rate of interest, there are chances that cost of your loan may greatly differ between these lenders depending on the method of interest rate calculation they adopt. If one lender is offering an interest rate lower than the other, it need not necessarily mean that the lower interest rate option works our cheaper for you.
The method of calculating interest plays a vital role in justifying the loss that can be incurred by the borrower.
Hence it is best to review the terms and conditions of different lenders prior to narrowing down on any deal. This always gives you a leverage to back out if any condition does not suit your requirement. Some of the important factors that should be kept in mind while going to shop for a home loan are:
1. EMI (Equated Monthly Installments)
The repayment of the principal and the interest on the home loans is undertaken through EMIs. The borrower needs to pay an EMI until her/his loan amount including interest is outstanding. The EMI amount may be different for different lenders because of the different calculation methods used by them.
Thus always check on the Home Loan EMI Calculators available online and do not finalise unless you are able to obtain a lower monthly payment.
2. Loan amount
The amount for your loan depends on a number of factors including the borrower's income, age, number of dependents etc. Also note that banks and lending institution generally consider 50 per cent to 60 per cent of your monthly salary to check on your ability to make EMI payments.
3. Margin money
The interest rate might be the same, but how much down payment would you need to do is also a factor worth considering. The higher the margin percentage, the more down payment you need to make.
4. Repayment period
Repayment period for a loan mainly depends on the borrower's age. The loan tenure allowed to a younger person will be more as compared to an aged person. This is because the risk associated with the demise of an old person is more than with the younger one. If an individual dies then there are chances that a loan may turn bad in the lender's book. So most lenders follow a simple strategy of greater the risk of default shorter the repayment period. Again there may be other rules that can vary depending on the lender.
5. Be alert
The actual cost of your home loan depends on the evaluation of interest rate charged by the bank. There are annual rests and monthly rests in the calculation of interest. The annual rest brings about a change in the interest rate on an annual basis. With the payment for the loan being made on a monthly basis, it will be beneficial for the borrower if the rests are calculated on a monthly basis as it will bring down the interest on a reducing capital basis and one can enjoy the immediate benefits. Hence it is advisable to be clear on your home loan agreement and establish on the mode of your interest rate.
As home loan is not a one time decision the points mentioned above can be helpful to a borrower. Otherwise, it is easy to fall into the interest rate hole dug by the misleading methods of some lenders.
Illustration: Uttam Ghosh/Rediff.com
