Home Loan
A home loan can be defined as the money borrowed to buy or build a home or to make changes in the already existing residential property. There are a number of services available for loans, for example, banks or registered house financing companies.
A home loan is taken against the property for which the loan is taken. This means that in case you are unable to return the money, the bank, or the lending authority, has the right to confiscate the property and take its possession.
Q1. What are the different kinds of home loans?
Ans: Following are the various types of home loans offered
- Home Buying loans
A common kind, taken to buy an existing house - Home Renovation loans
This type of loan is given for repair and renovation work of the home - Home Building loans
A loan sanctioned for the construction of a new house
- Home Expansion loans
Such loans are taken to extend an existing home. For example, adding another storey to home. - Land Buying loans
A loan taken to buy land for construction of a new home or for investment plans. - Balance Transfer loans
These loans are sanctioned to pay an existing high interest rate home loan by taking another low interest rate loan - Refinance loan
These loand are given to pay off any debt from private sources like friends or relative that you may have from a previous loan for your current house. - NRI loans
These loans are customized to suit the requirements of NRIs who wish to buy a house or settle in India.
Q2. What is the eligibility criteria for seeking any home loan?
Ans: To meet the criteria of home loan, most of the Indian lending authorities require you to be:
- A citizen of India or an NRI
- 24 or above at the time of the beginning of loaning period.
- Less than 60 years of age or below retirement age at the time when loan matures
- Either having his/her own business or being a salaried employee
Q3. What is an Equated Monthly Installment (EMI)?
Ans: EMI is the installment that the debtor has to pay to the lending authority every month. It consists of a sum of a little portion of the interest amount as well as the principal amount of the loan. EMIs have to be paid until the complete loan has been paid back.
Q4. What is the general interest rate range for home loans? What do the systems of Daily Reducing, Monthly Reducing and Yearly Reducing?
Ans: The interest rates for home loans vary with every institution’s policy but mostly the interest rate range remains between 8.75% and 12%. In most cases, Indian lending authorities use the monthly reducing balance or yearly reducing balance for calculating the interest amount but in some case, daily reducing balance may also be implemented for interest calculation.
- Annual reducing balance:
In the annual reducing system, the principal amount is reduced after the end of a year. Thus you keep paying the interest for a little amount of principal that you have already paid back during that year. Considering this, the EMI for monthly reducing balance is less than that for yearly reducing balance. - Monthly reducing balance:
In monthly reducing system, the principal amount reduces every month and thus, the interest is adjusted accordingly. - Daily Reducing balance:
In this system, the principal starts reducing from the day you pay your first EMI. Thus, EMI in daily reducing is less than that of monthly reducing system.
Q5. What does a fixed rate of interest mean?
Ans: Some lending institutions offer loans on fixed interest rates. This system means that even if the interest rates in the market change, you still have to pay the same amount of interest. The rate of interest remains the same throughout the period of loan payment with no concern to the interest rate change in market.
Q6. What does floating rate mean?
Ans: this system means that the interest rate varies with changes in market rate. This means that you may have to pay more than what you had planned earlier if the market interest rate rises.
Q7. What are the other expense the debtor has to bear after taking a home loan?
Ans: Home loans usually have the following extra cost to bear along with the actual loan and interest:
- Processing Fee:
This are the processing charges to be paid to the lender in any case. Depending on the lender’s policy, the fee may be a fixed amount or it may be a certain proportion of the loan amount with the condition that loan amount must exceed the processing fee. - Early payment Fine:
If the loan is being paid back before the decided period, a certain amount has to be paid to some lending institutions. It may be a percentage of the total loan, usually fixed at 2%.
- Misc. Cost
Some banks/companies may ask for documentation and consultation fee as well
Q8. Security is required to be deposited for home loans?
Ans: in maximum cases, the property itself becomes the security and no additional securities are required. The land/house is mortgaged for the entire period of EMIs. Whereas, some banks/companies may ask for additional security in the form of life insurance policy of the applicant, saving certificates, shares in the applicant’s name and FD receipts.
Q9. How do HFCs decide on the loan amount?
Ans: Most companies have their own system but usually 85% of the total value of the house is given. The remaining amount, the 15% ‘seed money’, has to be arranged by the applicant himself. The amount of loan to be approved varies from case to case depending the age, monthly income, no. of dependents, monthly/yearly repayment capacity of the loan applicant.
Q10. How much time it takes for disbursement of loans?
Ans: Usually it take around 3-15 days in disbursing the loan provided that all legal procedures and documentation is completed and the proof of the seed money (15% of the property cost) is provided to the seller of the land/house.
Q11. What are the tax advantages of home loans?
Ans.: Interest of home loans is a great attraction for tax advantages With the start of the assessment year 2005-2007. Principal amount about the reimbursement of loan with other savings such as PF, PPF.