Thursday, September 9, 2010

Home/Housing Loan Selection: What to Look for? Types of Home Loans

In this blog I'll help the readers of this blog on how to select thehome loan finance company, what are the points to look for, how & what to negotiate, ...

Home Loan can be taken for construction / purchase / repairs / additions / renovations of residential house / flat including the purchase of land and construction thereon. Home loan is kind of a benefit where you can get tax exemption for the interest & principal components. More info regarding this tax benefit can be found in this post -> "Home Loan, Tax Benefit & HRA Explained"

Home Loan are of 2 types, fixed & floating.
In Fixed, your rate of interest is locked for few years. So even if there is any change in the RBI rates, your interest rate won't change. Good right :) But for Fixed, the rate of interest will be very high. So good time to take a fixed home loan is when the home loan rates are really low. Like for Ex, if you get a deal of 7.5-8.5% then fixed is good.
In Floating, your rate of interest keep changing when there is a change in the RBI's rate of interest. Go for this when the interest rates are high.

Home Loan is provided by the Nationalized & Private Banks, I would strongly advise the customer to take a home loan in a nationalized bank rather than private banks.

Advantages of Nationalized Banks:
* Quick change in the interest rates to customers when there is a Change in RBI interest rates
* Loan would be approved only if there is no litigation & legally clear on all documents, so this would help you to check if the property has legally all clear documents.
* No hidden charges, all fees are transparent to customers.

Disadvantages of Nationalized Banks:
* Getting the loan approved is a tedious job
* Loan amount sanctioned would not be sufficient for your project
* Only 75-85% of the total construction/purchase amount will be sanctioned, the rest 15-25% depending on the loan amount & banks, you need to take care of yourself
* Most of the nationalized banks give loan only for 50% of your monthly net pay as EMI. That is if your monthly net pay is 40,000/- then you can get a loan with EMI of 20,000/- max
* Online facility is not available in most of the nationalized banks
* Customer service is not so great

Points you need to look for before selecting the banks:
* Interest rate: Always negotiate maximum possible for the interest rate. This negotiated rate remains until loan completion. Generally every bank have their own PLR (Prime Lending Rate) here its the HPLR (Home Loan PLR). This HPLR keeps changing based on RBI's rate change. So when you negotiate they will set a value 'x' with respect to HPLR, this value 'x' can differ from person to person, that is why you need to negotiate this.
Ex: If the current HPLR of a bank is 13% & you negotiate with the bank for 10%, then your 'x' value is 3, so if there is any change in HPLR due to RBI's rate change then your rate will change with 'x' value. If HPLR is decresed to 12% then your new rate of interest will be 9%

* Processing fee: In some banks its 0.5% & in some banks its a fixed value. Try to negotiate this value also. Generally they waive off this amount, atleast some amount if not fully.

* Prepayment Clause: Prepayment is if you have some money then you can pay that extra money to the bank & this amount will be directly deducted from your principal amount. Generally some banks have a restriction of only 2 prepayment in a year, some fine you need to pay if you do a prepayment, some banks will have min 3 EMI amount if at all your want to do prepayment. Nationalized banks generally don't have any clauses for prepayment. Its better not to have any clause for this.

* Foreclosure Clause/Fine: If you want to close a loan, then some banks will attract a fine of 2% of remaining principal amount, some banks will have only 80% preclosure can be done, ...

* Any hidden charges:

* Loan Insurance: Some banks will give you free insurance for the loan, but generally not many banks give this facility.

* Past History: How good is the bank with the customers, customer reviews, talk to existing customers.

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