For most people, one of the biggest milestones in life is to purchase or build a home. This, is one of the most important financial decisions in life and it involves a lot of planning and execution. There are many factors that need to be considered before choosing to invest in a property. Home buyers have to chalk out a step-by-step plan on how to save money, decide whether they want to go for a housing loan, check their home loan eligibility and compare various home loan offers, etc. While most buyers tend to get overwhelmed and emotional while buying a house, financial experts advise investors to do some sound research and plan the whole process practically. A strategic plan is a must to build your dream home. Let us explore some of the key factors to consider before applying for a home loan and understand how you can financially plan the same.
1. Understand what your budget is: Before making any other decisions, the first step to take is to set a budget. You will also have to decide whether you want to buy a constructed home or apartment, or a fully furnished home. This matters because there are different terms and conditions for home loans and construction home loans. So, the first thing to do is to take a look at a few houses, compare home loan interest rates and then set a budget. Let's, say you set a budget of Rs.50 lakh and decide to go for an apartment, the next step will be to decide how you will fund this. How much loan will you take? How much savings you have at your disposal?, etc. These are some of the questions that need to be answered before applying for a housing loan or arranging finances.
2. Decide if you want to withdraw your Provident Fund (PF): All PF holders are eligible to use 90% of the PF amount to make a down payment to purchase a home. In addition, the PF account can also be used to make contributions towards a home loan EMI. The funds from this account can be used for buying a piece of land or to construct a home. So decide how you want to plan your finances and see if you want to withdraw your PF.
3. Understand the tax benefits of taking a housing loan: Those who take home loans will become eligible to avail a number of tax benefits. Deduction claims can be made for the interest paid on the loan, the principal invested, and for registration and stamp duty fees. For interest payment, a deduction of up to Rs.2 lakh can be considered and for principal, a claim for tax benefit can be made for up to Rs.1.5 lakh. As far as charges for registration and stamp duty is concerned, the total exemption limit is Rs.1.5 lakh. On the other hand, if you are buying a home for the first time a tax deduction can be taken for a total of Rs.50,000.
4. Finalize how you will fund the home: After setting a budget, choosing what type of home you want and where you want it, you will have to figure out how you will fund the entire home purchase. See how much loan you want to take and how much you have in hand. The best thing to do is to compare home loan interest rates before you choose a bank or financial institution for the loan. Do a thorough comparison and choose a low interest rate.
5. Choose the total loan amount: Most banks in India allow applicants to avail at least 90% of the home price as loan. For example, if you are purchasing a flat for Rs.50 lakh, the sum total of the loan amount that you will get is Rs.40 lakh. So in this case, you have to make sure you make arrangements for Rs.10 lakh. Many financial experts say that it is best if you are able to fund at least 30% to 40% of the total cost through savings. So, if you are planning to go for a home purchase, start planning for it financially well in advance. It is recommended that prospective home buyers start the saving process for a down payments at least 5 years in advance. If this is not possible, one should start saving at least 2 year to 3 years well in advance.
6. See how much EMI you can pay: Another important factor to take into account is the EMI amount that you will be paying. See what household expenses you will have each month and other investments that you have to contribute towards. Use a home loan EMI calculator to determine how much your monthly contribution will be and finalize on an EMI amount.
7. Know your rate of interest: The rate at which you avail a loan will significantly impact the EMI and also the overall cost of the loan. Beware of floating interest rates as they will keep changing according to market fluctuations. It is ideal to choose a fixed rate of interest, especially if the period for which you are taking a loan is short to medium.
8. Understand terms and conditions: Before applying for a home loan, first understand what you are getting into. All regulations that are relating to the settlement, foreclosure and prepayment needs to be looked into to avoid any confusions at a later stage. Take a look at the turnaround time and also know if you have to pay any legal or loan processing charges before you finalize on your home loan provider.
Financial planning is essential before applying for a home loan as this allows buyers enough time to meticulously arrange and plan out how they want to fund the whole purchase. Just making a sudden plunge without any type of prior pre-planning can lead to a lot of confusion and financial stress at the last minute.
(This article was originally published on BankBazaar.com)