Are you planning to take a home loan

The cost of a home has reached unimaginable heights. Many aspire to own a roof rather than live in a rented house. Here are a few factors that prospective borrowers must bear in mind before approaching a lender.

Tenure

Plan the tenure of your loan. Borrowers fall under two categories - the anxious and the complacent. The anxious ones are keen to repay their dues as soon as possible. They fear defaulting in case the rates surge to unaffordable levels.

Paying off the home loan commitment gives them the much-needed peace of mind. Short loan tenures are hence preferred by the anxious borrowers. Short tenure translates into heavy home loan repayment burden for the borrower. The monthly EMIs are high and sometimes become difficult to manage.

Those borrowers who cannot afford to pay huge monthly EMIs seek longer tenures. The complacent borrower keeps repaying his debt over the 15 to 20 year period. While EMIs appear more affordable over the longer tenure, the borrower actually ends up paying more interest to the lender for his loan. It has been observed that most borrowers end up prepaying their loans within an eight year period.

Arrive at right tenure by taking into account your tolerance to rate fluctuations, affordability and other financial obligations.

Amount

The decision on the loan amount depends on your current income level, growth prospects, other financial commitments, current debt obligations like a car loan, personal loans and other assets that you can fall back on.

A huge loan can mean a huge repayment obligation that not all borrowers can easily manage. This could lead to financial crisis and increase stress. Before opting for a huge house and a bigger loan amount, bear in mind that one mustn't fall into the debt trap. Borrow only the amount that you can repay with ease.

Options

Fixed, floating, step-up, step-down, hybrid - borrowers have a wide platter of options laid out before them. Fixed rates are more expensive compared to floating rates. However, floating rates are unpredictable and can fluctuate in either direction.

Hybrid loans are a middle path between fixed and floating options. The borrower can lock a portion of his loan amount under fixed and expose the remaining under floating rate.

A step-up loan is a kind of home loan which offers varying equated monthly installments (EMIs) spread over the loan's tenure. During the initial years of the tenure of the step-up loan, the EMIs are low. This makes it affordable for the young working population that holds tremendous growth prospects. As the years roll by, the EMI outflow increases.

It is assumed that the borrower will grow up the ladder, get promotions and earn increments. Hence, though the EMI increases with time, it will still appear affordable for the borrower. Since a step-up loan takes into account the future earning potential of the prospective borrower, it increases his loan eligibility.

If a borrower is close to his retirement years and has a huge earnings capacity, some lenders offer step-down loan products. Here, the rates are huge initially as the borrower can easily afford high EMI repayments. Gradually, as the years roll by, the EMI installments come crashing down. This is the step-down loan, where the burden of EMIs comes down with time.
source:http://economictimes.indiatimes.com/Features/Financial_Times/Are_you_planning_to_take_a_home_loan/articleshow/2867632.cms