For most of us, a home is a dream purchase, which offers an opportunity to choose where you want to live. The structural demand for housing is very strong in India, and this demand only continues to rise. Amid the rising costs of owning a home in India, a home loan is the most common way to buy a house. In the case of a home loan, the borrower takes a loan from the bank, and then pays it back over time, often with monthly payments that are like the loans of other categories.
With mortgage rates currently at their lowest in a long time, this might be the right occasion to take advantage of these rates and finally purchase your own home. However, it has been seen that homebuyers are often tempted to go with the first lender they come across in such a scenario of low-interest rates. That may not be the best choice, as there are several things to consider before locking in a loan and committing to a set interest rate for the long term.
There are many factors such as your credit score, your income level, down payment amount, etc., that affect the interest rate of a loan offered by a financial institution. In addition to the interest rate, there are several other factors like lender reputation, tenure, repayment, and other charges which need to add up to compare the best lender in the market.
Even after conducting your research and zeroing down on a lender that you believe matches your interest, there are several ways with which you can save money in your home loan journey. But a crucial step in this journey towards saving money is to have an in-depth understanding of what a home loan is, the types of home loans, and things that must be considered when planning to take a home loan.
Here is all you want to know about home loans including how you can save money on your home loan:
What is a home loan?
A home loan is a type of loan, usually taken to purchase a house. It is often one of the largest debts that someone will borrow in their lifetime.
Home loans are a great way to save money, but it's important to know all the details of the loan before signing on the dotted line.
Types of home loans
There are two main types of home loans - fixed-rate and variable rate. Fixed-rate loans provide stability in payments and interest rates, while variable-rate loans allow mortgage payments to fluctuate slightly in response to changes in interest rates.
Fixed-rate home loans have a set interest rate that doesn't change throughout the term of the loan. This means that your payments remain stable over time, but your overall interest may be higher than with variable-rate loans.
Variable-rate home loans are based on an index or other agreed-upon formula for setting changes to the interest rate. This means that your payments could go up or down over time, depending on how rates move during this period.
Things to remember when taking a home loan
A home loan is a type of loan which a person takes for buying a house, building a house, or refinancing an existing mortgage.
The following are some key points to remember when taking a home loan:
How to save money with Home Loans?
Getting a good home loan is a key to financial security. It is no wonder that many are looking for ways to save money on their home loans. The good news is that several options can help you save on your monthly payments.
You can save a lot on your home loan just by basics like checking the interest rates and reading all the terms and conditions among other things.
A good thumb rule of saving money on a home loan is to take out the most economical loan possible, and then pay it off as quickly as possible. This way you can save money on interest since you are making monthly payments on the principal balance that are smaller than required with other mortgages.Here are some of the more popular methods to save money on your home loans:
Part Prepayment: One way to save money with home loans is through part prepayment. Part prepayment, as the name suggests, means that you would be making partial payments on the due principal in addition to the monthly EMI. You can reduce your interest outgo by making regular part pre-payment in the duration of the loan tenure. You can always use annual bonuses, any other unexpected financial gain, or your other investments to make part pre-payments.
The main benefit of part payment is that you will save money on interest over time. You should always check with the lender for any charges that you may have to incur for part prepayments. If you can afford to do it, you should make early payments on your home loan every month instead of paying off the interest over some time. This way, you will be able to lower your total interest and get out of debt faster.
Negotiate with the lender: Negotiating is when you request a lower interest rate on your home loan with the lender. You can also request an extension on your repayment date.
The result of the negotiation would depend on your relationship with the lender. However, it is important to understand that you are in a financial relationship with the lender wherein the lender understands that you are a good customer, and it would be costly to lose you. Therefore, you can always request for negotiation in case you are getting a better deal with any other lender.
Negotiation can help get you a lower interest rate and better terms if done properly. You would be able to save more by using your negotiation skills efficiently.
Choose a balance transfer: A balance transfer is usually a stage where the negotiation has failed. In case you still believe that you are getting a lower interest rate with any other lender, you can opt for a balance transfer for home loan.
A balance transfer of loan is when you get your remaining balance on a home loan transferred to a new lender. The new lender would settle the remaining payment to your existing lender, and you would be expected to pay the remaining monthly EMIs to the new lender.
There is usually a small processing fee involved in the balance transfer. Therefore, it is important to consider the processing fee and other charges of the new lender before deciding to opt for a balance transfer loan.
You would be able to save money by getting a reduced interest by opting for a balance transfer loan.
Make a big down payment: One of the clever ways to save money on a home loan is to pay up a big down payment so that you only take the totally necessary amount. You can use all your available funds to make a big down payment which will reduce your interest outgo on the loan amount. This can be better explained with the help of an example.
For instance, a loan amount of Rs. 50 lakh will cost you Rs. 62 lakh in interest alone over 20-year tenure at a 9.55% interest. However, if you can reduce your loan requirement to Rs. 40 lakh by arranging over Rs. 10 lakh, you would end up saving Rs. 12 lakh in interest in the 20-year tenure. As explained with the help of the example above, it is always better to make a big down payment rather than taking an additional loan amount.
However, it is suggested that you keep some amount as an emergency fund which may be required in case of any exigencies. Also, you should keep in mind that you may need some funds for a medical emergency. Do keep a check on both these points as you calculate how much can you spare for a down payment.
Do thorough research before taking a loan:This is one of the most underrated steps that can help you save a lot of money in your home loan journey. You should do a thorough research of the available options and also weigh the various charges that are being levied by lenders.
This will help you to get a clear picture of what you are getting into and what the other lenders are offering. You can always check on the individual website of lenders and on third-party platforms that will help you get more information at a single point.
You can also continue your research at regular intervals to check what kind of interest rate changes are happening in the market and what you are paying in comparison.
Use idle investments: Investments are a good way to build wealth. However, it should not come at a cost of high interest. For instance, if you are already paying interest on your home loan, it makes more sense to pay up the loan first rather than investing that money and then hoping that it will be able to make more than what you are paying as interest.
At the same time, you can always make use of your idle investments and pay up the remaining loan amount quickly. You can dip into your mutual fund holdings, ULIP policies, or any other such investments that can help you with additional funds that can be used to pay up the loan first.
Increase monthly EMI: As a home loan is for a longer tenure, you can always increase your monthly EMI with an increase in your income. You can ask the lender to reduce the tenure on your loan with the increase in EMI. An increased EMI will, therefore, reduce the interest outgo on your home loan.
It is suggested that you review your EMI amount on an annual basis and if you can increase the EMI amount, you should go for it. You would be able to substantially reduce your interest component on a home loan by increasing your monthly EMI regularly. However, do keep in mind that with the increase in income, there would be an increase in expenses. Therefore, you would be required to account for increased living costs as well.
Avoid additional charges: You should always keep a track of your EMI cycle and not end up paying additional charges. You may have to pay additional charges in case your EMI does not get cleared in time. You can always keep your EMI on auto-debit and maintain adequate balance so that you can maintain your EMI cycle.
This behavior not only keeps your EMI in check but also lets you maintain a healthy credit score. It is a known factor that if you continue to not pay EMIs as per the regular cycle, the lender must report your repaying behavior to credit bureaus which can lead to a poor credit score over time. Also, an irregular repayment cycle will cost you a lot of money in charges and penalties which would increase the overall liability on a home loan.
These are some of the ways which can help you save money on your home loan. You can always apply your home loan requirements with Poonawalla Housing Finance. We are known for offering competitive interest rates with zero hidden charges and higher loan amounts. File your home loan application with Poonawalla Housing Finance and experience best-in-class service.