Owning real estate is one of the smartest investments you can make, as the value of properties increases each year while the demand for them grows each day. Unless you have a huge amount of cash just lying around, the easiest and most practical way to obtain properties is through a home loan.
With reasonable monthly dues and several different payment structures to choose from, taking out a loan is a viable option for many homebuyers. But before you apply for home loan, there are important factors you should take into consideration to avoid encountering issues down the road.
Whether you’re planning to buy real estate for property investment or home ownership, consider these six factors before you apply for a home loan.
Lender of Choice
With the help of technology, researching your available options has never been easier. That said, you have to take advantage of this and do a thorough research before settling on the right lender.
Decide which rates and EMI (equated monthly installments) are most suitable for your situation. Make sure you’re familiar with all of these details before agreeing to a plan to avoid surprises or rude awakenings.
It’s no secret that having a good credit score is the key to getting favorable rates and repayment structures. In fact, it’s the first thing that lenders refer to when reviewing your loan application.
Your credit score and history are the primary indicators of how well you’ll be able to keep up with your debt. Having a credit rating of 700 to 900 is considered great by many lenders, leading to easier loan approvals.
But there’s no need to worry if your score isn’t in that ballpark. There are still ways to get your loan approved with low ratings or zero credit history. To get more favorable deals and an easier transaction, loan experts recommend you boost your credit score first before applying for a home loan.
Rate of Interest
When applying for a home loan, you’ll be given two options: fixed and floating. A fixed rate means the interest rate on your loan stays constant from the time it was granted, regardless of any fluctuations and changes in the financial market. On the other hand, a floating rate varies, depending on the condition of the market.
Most borrowers prefer floating interest rates as they have the opportunity to go down as the years go by. But that’s a double-edged sword as they may also increase. If you want to be on the safe side, opting for a fixed rate is recommended for you.
When it comes to prepayment, home loan borrowers may choose between reducing their EMIs (monthly payment) and the loan duration (overall cost). In general, you should always try to get the shortest plan you can, but there’s also an upside for going for a reduced loan tenure.
Opting for reduced loan tenure will result in greater long-term savings because you pay less in interest. On the other hand, choosing the EMI reduction option will lead to higher disposable income or the money you have the freedom to spend. Both options are fine, and your decision will boil down to which of the two you value more.
As a general rule, you must always have an emergency fund to deal with financial turmoil or unavoidable expenses. Ideally, an emergency budget should be large enough to cover rent for at least six months, insurance premiums, children’s tuition, etc.
If you are maintaining an emergency fund, do not use it to pay for a home loan prepayment. Doing so might force you to take out huge loans should a financial emergency come up.
Stable employment and a regular source of income are crucial for your home loan application. Needless to say, these factors will help provide a favorable impression to lenders as it determines whether you can pay for the loan you’re applying for.
A home loan is a very helpful form of financial assistance to purchase a property if you are short on cash, or are not in favor of liquidating your assets. By considering the factors above, seeking a home loan can become much easier.