When we think of buying a new home, the first thing comes in our mind is taking a home loan because it is not always possible to use our savings for such a big purchase. When we think of a home loan, we think of interest rates. Wait for a while and think again! Housing loans should not be compared only on the basis of interest rates.
While interest is an essential factor, but it is definitely not the only one factor on which you can base your decision. Some other factors must also be taken into account. Let us check those factors:
Factors to consider when you compare home loans:
1. Floating or Fixed?
When you look at the interest rate at which a home loan is offered, make sure you find out whether that rate is floating or fixed rate home loan. You need to decide whether you want to go for a floating rate or a fixed rate loan. In case of a fixed rate home loan, the interest rate remains fixed and it will not change throughout the loan period, irrespective of any changes in economic or market conditions.
However, if you opt for a floating rate, the interest rate is linked to the Prime Lending Rate (PLR). So, in case of the rate increases, the lender will extend the period of the loan without touching the monthly installments i.e; EMI and the converse when the rate decreases. However, it is necessary to mention that fixed interest loans are also not actually fixed and the lenders can change the interest rate at their discretion and it is also not possible to predict interest rate movement for the future. There are loans that lie in between two; fixed for some time in the starting and then floating. Fixed rate loans are mostly higher than the floating rate loans. Fixed loans provide certainty and are best for those who do not want to take any kind of risk.
2. Processing Fees:
When you apply for a loan, you need to submit certain documents and these documents will be verified and processed. Lenders charge for this process and it is known as the processing fees.
These processing charges are also dependant on the bank’s guidelines and may vary within the same lending institution depending on the loan amount. It can be a percentage or part of the loan amount or may be a fixed amount. It is mostly dependent on the loan amount. If you are a tough negotiator or the company that you work for has some special tie-up with the lending institution, then sometimes it is possible to get these charges waived.
3. Mortgage Deed Charges:
This is a large amount and should be given due weightage when choosing the lender. Like interest rates, this differs from institution to institution.
So even if there is a difference of 0.1% between the two institutions on a loan amount of Rs. 50,00,000 then the actual difference will be Rs. 5000. There may be some lenders that may not levy any mortgage deed charges, but indeed there will be some higher charges or some fine print elsewhere so do not get attracted by such promises.
4. Legal Fees:
While purchasing a house is a big decision for the borrower; sanctioning a loan is also an important decision for any lender. They are obligated to check the legal status of the property for which they were approving the loan. It is necessary for them to ensure that the property is not disputed and has various clearances. In this process, they hire lawyers and the charges are recovered from the borrowers.
However, there are some housing projects by reputed builders in each town that are approved by banks. If you plan to purchase a house in such an approved project, then you will be saved from paying the legal fees.
5. Insurance Cover for the Home Loan:
While insurance cover for your home loan is vital, make sure you opt it according to your needs. Some lenders may add it up with the loan, i.e; add the cost to the EMI where you do not get a choice about the insurer or other details. You will surely need to pay separately for this! Do not accept any deal just because your home loan lender insists be sure to understand it well before signing the papers.
6. Pre-closure Charges:
Every borrower would surely like to get the burden off as soon as possible. However, this may not be as easy as it sounds because most of the lenders levy preclosure charges. Recently, the Reserve Bank of India stopped banks from charging pre-closure charges on floating rate interest loans. So, if you already have a loan it is essential that you check with the lender on the status of the preclosure charges.
Hope the above factors will help you to compare home loans with an outlook that goes beyond the interest rates. The interest rate is also important and is generally a long-term commitment. So keep an eye on it too!