Top 6 Mistakes To Avoid While Taking A Home Loan
One of the big decisions you will take in your life is buying your first house. And, most people have to take a home loan in order to buy a house. As a home loan is one of the biggest long-term commitments you will ever be making in your lifetime, it is not a good idea to take a hurried decision. You need to consider various aspects like home loan tips and make an informed decision so as to avoid home loan mistakes. You should never apply for a home loan just because your friends and family members are doing so or recommending you to do the same. Having said that here are a few aspects you must consider before applying for a loan. Let’s dive into the top mistakes to avoid while taking a home loan.
Things to Consider to Avoid Home Loan Mistakes
- Floating Vs. Fixed Interest Rate
Home loans can be availed either on floating or fixed rates of interest. As the term suggests, a fixed interest rate remains the same despite the interest rate changes announced by the Reserve Bank of India from time to time. On the other hand, the floating rate changes when the central bank raises or cuts the key interest rates.
Now, if the tenure of the home loan you are taking is short (five to seven years), then it is a good idea to opt for the fixed interest rate. On the other hand, if the tenure of your home loan is longer (20 years or more), then it is recommended that you opt for a floating interest rate.
- Not Negotiating Enough
It is important that you strongly negotiate the terms and conditions with the lenders (banks and financial institutions) that you are planning to work with. Then, choose the lender that offers the best terms and conditions. It helps you to reduce the cost of your home loan. Most people who avail loans blindly accept the lender’s proposal and this is by far one of the biggest home loan mistakes. Many people are also not aware that they can negotiate the terms of the loan agreement with the lender. When you negotiate and get the best deals on processing fees, interest rates, and other charges, you will be nicely surprised by the impact they have on your costs.
- Falling for Teaser Loans
Not only financial institutions but also banks often allure customers through home loan offers. You may think it is a good idea to take advantage of such offers and cut your interest costs. However, it is important to be aware that teaser home loans are adjustable mortgage loans wherein the interest rate you will lower in the beginning. However, as time passes you will have to pay higher interest rates. So, avoid falling for tricky teaser loans. Always do proper research, get a clear understanding of the lender’s terms and conditions – including switching cost, processing fee, and prepayment charges – before going ahead with accepting teaser home loan offers.
- Not Insuring Your Home Loan
The problem with not insuring your home loan is that your family will inherit the loan instead of the home. This is yet another among top home loan mistakes that many homebuyers commit. If you happen to be the only earning member in your household, home loan insurance assumes a lot of importance. This will come in handy and save your family members from any financial problems in the event of your sudden demise. It is okay if you are not interested in taking home loan insurance, but you must buy life insurance in order to cover the risk. Additionally, it is a good idea to take a critical illness policy for covering your home loan liability. This will be helpful if an unforeseen event disrupts your ability to earn an income in the future.
- Neglecting One-time Costs
Home loans help many people achieve their dream of buying a home. Many people think only about the interest cost when shopping for a home loan. Actually, several one-time costs and hidden charges are also involved. They include the loan processing fee, administrative fee, document charges, Memorandum of Deposit of Title Deed (MODT) charges, legal fees, technical inspection fee, etc. Most people tend to neglect such one-time costs and struggle to arrange funds later on. It is, therefore, highly recommended that you prepare a realistic budget and allocate funds for each item. Further, it is recommended that you consider maintenance costs and property tax payable by you so that you are clear as to what your monthly outgo will be.
- Not Working Out Your Repaying Capacity
Most people take home loans without properly working out their repayment capacity. This often lands them into financial problems later on. Lenders, on their part, determine whether you will be able to comfortably afford your monthly payments. This is because they stand the risk of not realizing returns on their investment if you default payments. Therefore, lenders always look at your income as well as employment to assess the risk involved and your ability to repay debt. You should also work out your repayment capacity by assessing your current financial situation. This will enable you to meet your day-to-day expenses and also pay the EMI without feeling any financial stress.
In conclusion, the home loan is one of the important things to consider before buying a house. So think carefully about all of the above-mentioned aspects to avoid home loan mistakes that many people often commit. A good option would be to borrow an amount you can comfortably repay.
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