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Thursday 16 July 2015

Are you aware of the terms involved in a home loan


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Buying a new home with the help of a home loan is now very common. Since, there are n number of financial institutions to provide loan, there is a huge competition. So, it is very usual that this competition forces them to make the proceedings a little easier and a little convenient.

Recently, there is  a discussion among our friends about home loan, the process and the terms involved. The discussion started as Ajay wants to buy a new home with the help of a home loan. Aarav is already in a home loan, which helped Ajay to discuss all the basic terms about the same. The discussion goes on like this...

Ajay : Saw a house. All of our family members liked it. But it costs me a fortune. So, planning to go for a home loan.

Aarav : Ohh! Is it! So how much are you planning to pay as down payment

Ajay :  (New to all these terms) Down payment?!

Aarav : ( already in a home loan)  It is very important to know everything about home loan before you go for it. So, Down payment is the payment made in the form of cash as the initial payment, when you buy a home. The percent may vary from 5% to 25%, with respect to the seller. For the rest of the amount, you can arrange for a home loan. So, you should know how much cash you can pay before applying for a home loan.

Ajay : Hmm, So, what are the other things that I should know...

Aarav : OK... For the rest 85% say, you are going for a home loan from a financial institute. You know that, the financial institutes approve the loan after verifying your personal details and the property's details. Now, before you apply, you should decide about the  interest rate for your loan. There are two rates which are depended on the RBI's repo rate. They are, fixed and floating or adjustable.

Ajay : Oh, fixed interest rate is the rate which stays constant for the entire term, and floating is the rate which will change periodically with the market.

Aarav : Very true Ajay. This needs some research. So do before you decide.

Ajay : And next is the tenure.

Aarav : Is it just the number of years I take the home loan?

Ajay : Yes, ofcourse but, it is not just..there is a lot in it. Tenure depends on the EMI (Equated Monthly Installments) you can pay. Usually, EMI and tenure are inversely proportional. The more you opt to pay in a month, the lesser the years you will pay the loan. Tenure also depends on your age and length of the career. This is another aspect you should know about.

Aarav : Is there anything more to know and to check before I go for a home loan.

Ajay : Yes, the financial institutions charge processing fees. To get our work done, institutions do some ground work which involves documentation process, underwriting process, legal charges, etc. It usually varies from 0.25% t0 0.5%. Due to huge competition, there are some institutions which do not charge the fees.

Aarav : That's interesting. Though minimal, we should try to reduce the cost in all means.
Ok, it is now my piece of cake to make a wise decision.

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