Most Common Mistakes People Make While Taking Home Loans
Buying a house is one of the biggest decisions that anyone can make in their lifetime. So, it is important that you don’t take this decision in a rush and think twice before deciding on a house.
So, we have come up with a list of mistakes that people make while taking home loans while buying their house.
The ‘India Real Estate Report 2021’ released in January 2022 showed that 76% of Indians choose property as their most popular investment option.
The survey found that 43% of its respondents are looking to purchase another property for investment purposes in 2022. 84% of respondents believe that right now is the best time to buy a property for end use.
We have all been spending a lot of our time inside our houses ever since the pandemic began. Almost all companies have asked their employees to work from home, while most employees have begun to offer remote opportunities due to the flexibility it offers to the employees.
Buying a house might have been our dream even before the pandemic but the new dynamic of working from home has illustrated the importance of having your own comfortable place.
There are several aspects to consider before taking a loan and it is important that you don’t make any mistakes, which might end up costing a long of money to you.
Here is a list of common mistakes that most people make while taking home loans.
Not Selecting The Property First
Once you decide that you are going to take a home loan, you will be looking for banks that offer the best interest rates.
Even though there is nothing wrong with choosing the lender first, you would need to understand whether you will be eligible to get a loan from that particular lender.
Most banks will offer loans for ready-to-move-in properties and under-construction properties with famous and approved builders and projects. However, if the property is unapproved or unauthorized, there is a possibility that the bank will reject your application.
So, before zeroing in on the lender, it is important to finalize the property first. Also, check all legal documents related to your property and authorization, and then apply for a loan.
Sometimes, if the bank is not satisfied with the property location and according to the market price evaluation, it will revise the amount and pay you a lesser amount. Hence, it is important to finalize the location and then search for a bank to get the loan.
Not Saving Enough For The Down Payment
Usually, people assume that they will buy an under-construction property and they can pay the down payment proportionately as the bank will pay the maximum amount.
However, most banks will ask you to show the details of your savings and funds before offering you the loan. So, you should have enough money to make the down payment for the house.
Your down payment requirement will depend on the type of mortgage you choose and the bank. The down payment will be anywhere between 10% and 25% of the property’s market value.
For example, if a 2BHK apartment costs about ₹60 lakhs, the down payment will be between ₹6 lakhs and ₹15 lakhs. In order to build your down payment fund, you have to avoid unnecessary expenses, pay off your debt, and save diligently.
Not Choosing The Right Type Of Interest
The amount of loan granted is usually dependent on your income and is around 90% of the total valuation of the house.
While choosing the loan, you must decide whether you want a fixed rate of interest or a floating rate of interest.
With a fixed rate of interest, you will end up paying the same EMI until the end of the tenure, and it doesn’t get affected by market fluctuations.
Floating interest rates are usually a little less than fixed interest rates, and if interest rates in the market decrease, your EMI amount will also go down.
It is a good idea to choose a fixed rate of interest if you are taking the loan for a shorter duration such as five to seven years.
On the other hand, if you are going to repay the loan in 20 years or more, then you should take a loan on a floating rate of interest as you can’t predict the changes for such a long duration.
When choosing a bank for a floating rate of interest, choose a bank that deals with the base rate as it will be more transparent than the process followed by those who don’t tell you the base rate of the loan.
[ Related Article: Looking for ways to increase your home loan eligibility? ]
Not Preparing For Emergencies
Before you take a home loan, it is important that you have an emergency fund.
If your current emergency fund can cover up to six months of monthly expenses, increase the fund size so that it covers up to 12 months of expenses. If you don’t have life or health insurance, make sure you take one.
Life insurance will make sure your loved ones are not burdened with debt in case of loss of life. Also, medical emergencies can drain funds and make you financially vulnerable. So, make sure you have health insurance too.
Not Checking Your Credit Score
Your credit score will determine how much loan you could get from the lender and it will also affect the interest rate offered by the lender. Most banks lend based on your credit score.
If your credit score is high, the interest rate on your home loan will be low. You can get free copies of your credit report to check your credit score. Please read our blog about credit scores to learn more about how they work.
Try paying your bills on time and keep your credit card balances as low as possible. Don’t try to close your old credit cards, as it may negatively affect your credit score.
So, if your credit score is not looking good, try improving it over a period of time to get the best interest rate on your home loans.
In The End…
Buying a house is one of the most important decisions in our lives.
So, it is essential to make informed decisions about where to buy the house, how much to buy it for, and where to take the loan from.
The other important thing that you need to remember is to not overstretch your budget and go for something that you can’t afford.
At the end of the day, you need to pay back your loans, and the prices of flats, villas, etc., are not cheap these days. So, choose something that suits your budget and your lifestyle.
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