Buying your own dream home is the biggest goal and dream of every person's life. From big cities like Mumbai, Delhi, Bengaluru to small towns, whenever a person plans to buy a new flat or house, the first thing he turns to is a home loan. Home loan is a means which helps in converting your years old dream into reality. However, this is a financial deal that demands a long-term commitment, not just of a few months or years, but of 15 to 30 years. Often people see the bank's attractive advertisements and attractive offers of low interest rates and sign the loan agreement in a hurry without complete information. But later when hidden charges, changing interest rates and stringent penalty clauses come to light, this joy turns into a financial burden. If you are also planning to take a home loan this month or in the coming days, then wait and understand these 3 most important and basic things thoroughly before signing your file, so that your financial future can remain secure and worry-free. First thing: Choosing fixed vs floating interest rate and nuances of reset clause The first and most important decision while taking a home loan is to choose the right interest rate. Mainly banks offer two types of interest rates – Fixed Interest Rate and Floating Interest Rate. In fixed rate, the interest rate on your loan remains constant for the entire tenure, whereas in floating rate, the rates keep fluctuating as per the repo rate policy of the Reserve Bank of India (RBI). Most people initially opt for the seemingly lower floating rate, but before signing the agreement it is important to check what the bank's 'Benchmark Lending Rate' (EBLR/RLLR) is and how the reset clause works. Many times when RBI increases the repo rate, banks immediately increase your EMI or loan tenure. Additionally, many fixed rate contracts have a 'reset clause' hidden in them, under which banks can change the interest rate after 3 or 5 years. Therefore, it is mandatory to read this page of the agreement very carefully. Second thing: Hidden charges including loan to value ratio (LTV) and processing fees When you go to buy a property, the bank never gives 100 percent of the total price of that house as a loan. According to the rules of the Reserve Bank, banks finance only 75 to 90 percent, which is called Loan to Value Ratio (LTV Ratio). You have to pay the remaining 10 to 25 percent amount as 'down payment' from yourself. Before signing the agreement, ensure how much burden the down payment is putting on your pocket. Additionally, don't just focus on the interest rate but also ask for a list of hidden charges like processing fee, legal and technical verification charges, documentation fees, and property valuation charges. Many times banks claim to waive the initial processing fee, but charge a huge amount in the name of file charge or administrative fee. Proceed with the loan agreement only after calculating all these hidden expenses. Third point: Prepayment penalty, foreclosure rules and the real truth about home loan insurance The third and most important thing to consider before signing the home loan papers is the loan repayment rules and the terms of the insurance policy. If in future you get lump sum money from somewhere and you want to repay your loan ahead of time (Prepayment or Foreclosure), then know whether the bank will impose any penalty on it or not. Although, as per RBI guidelines, prepayment penalty is completely banned on floating rate home loans, banks can still charge the penalty on fixed rate loans. Additionally, while sanctioning loans, bank officials often pressure customers to purchase an expensive 'Home Loan Protection Insurance Policy'. You should know that it is not at all mandatory to buy insurance from the bank itself. If you want, you can also secure your loan by taking a cheap term insurance policy from the market. To become a sensible borrower, it is very important to follow these additional suggestions. Apart from these main three things, always maintain your credit score (CIBIL Score) above 750, because a good CIBIL score gives you the power to negotiate to get a loan at a lower interest rate from the bank. Additionally, your total monthly EMIs should not exceed 40 to 50 per cent of your in-hand salary, so that your budget is not adversely affected in emergency situations. Taking a home loan is one of the biggest financial responsibilities of your life, so get all the documents, NOC and title deed checked by legal experts and sign them without any pressure. Only correct information and vigilance can save you from major financial problems in future.
