There are a variety of home loans available. They are:

HOME PURCHASE LOAN

This is a common loan for buying a home.

HOME IMPROVEMENT LOAN

This loan is given for undertaking repairs, renovations and/or up-gradation to your home.

HOME CONSTRUCTION LOAN

This loan is available for the construction of a new home.

HOME EXTENSION LOAN

Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc.

HOME CONVERSION LOAN

Home conversion Loan is available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home, including the additional amount required, eliminating the need for pre-payment of the previous loan.

LAND PURCHASE LOAN

This type of loan is sanctioned for purchase of land for home construction.

BRIDGE LOAN

The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home.

BALANCE TRANSFER LOAN

Balance Transfer loans allow you to pay off an existing home loan by availing a new loan from another willing lender institution.

REFINANCE LOAN

This loan assists you in paying off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.

LOAN TO NRIs

This type of loan is personalized for the requirements of Nonresident Indians (NRIs) wishing to build or buy a home in India. These loans are provided by eligible financial institutions in accordance with the guidelines issued by Reserve Bank of India from time to time.

STAMP DUTY LOAN

This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of a property.

EMI (Equated Monthly Installment) is the amount payable to the lending organization on monthly basis, till the complete loan is paid back. EMI is a combination of interest due and a portion repayable towards the principal.

• Free accident insurance
• Waiving of pre-payment penalty
• Waiving of processing fee
• Free property insurance
• Some of the lending organizations sanction the loan in-principal in advance of your identifying the property

Lending organizations in India have some criteria that you need to fulfill to qualify for a home loan, as:

• An Indian resident or NRI
• Above 21 years of age at the commencement of the loan
• Below 65 when the loan matures
• Either salaried or self-employed and
• Worthy of credit facility

Lending organizations generally offer either of the following loan options: Floating Rate Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate of interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In case of a pure fixed loan, the EMI due to the bank remains constant. If a bank offers a Loan which is fixed only for a certain period of the tenure of the loan, please try to elicit information from the bank whether the rates may be raised after the period (reset clause). You may try to negotiate a lock-in that should include the rate that you have agreed upon initially and the period the lock-in lasts.

Hence, the EMI of a fixed rate loan is known in advance. This is the cash outflow that can be planned for at the outset of the loan. If the inflation and the interest rate in the economy move up over the years, a fixed EMI is attractively stagnant and is easier to plan for. However, if you have fixed EMI, any reduction in interest rates in the market, will not benefit you.

DETERMINANTS OF FLOATING RATE

The EMI of a floating rate loan changes with changes in market interest rates. If market rates increase, your repayment increases. When rates fall, your dues also fall. The floating interest rate is made up of two parts: the index and the spread. The index is a measure of interest rates generally (based on say, government securities prices), and the spread is an extra amount that the banker adds to cover credit risk, profit mark-up etc. The amount of the spread may differ from one lender to another, but it is usually constant over the life of the loan. If the index rate moves up, so does your interest rate in most circumstances and you will have to pay a higher EMI. Conversely, if the interest rate moves down, your EMI amount should be lower.

Also, sometimes banks make some adjustments so that your EMI remains constant. In such cases, when a lender increases the floating interest rate, the tenure of the loan is increased (and EMI kept constant).

Some lenders also base their floating rates on their Benchmark Prime Lending Rates (BPLR). You should ask what index will be used for setting the floating rate, how it has generally fluctuated in the past, and where it is published/disclosed. However, the past fluctuation of any index is not a guarantee for its future behavior.

FLEXIBILITY IN EMI

Some banks also offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by.

Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

These are the methods in which lending organizations calculate interest on home loans.

YEARLY REDUCING

In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender through EMIs paid during the year. This means the EMI for the monthly reducing system is effectively less than the annual reducing system.

MONTHLY REDUCING

In this system, the principal, for which you pay interest, reduces every month as you pay your EMI.

DAILY REDUCING

In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.

Calculate the total amount payable under the different loan options available for a fixed loan period and amount. The loan under which minimum total amount is payable will be the cheapest source of funds.

Home loans usually attract following extra costs:

• A fee as Processing Charge payable to the lender on applying for a loan. It is either a fixed amount or may be a percentage of the loan amount applied.
• When a loan is paid back before the end of the agreed duration, a pre-payment charge is demanded as Pre-payment Penalties by some banks/companies, which is usually between 1% and 2% of the amount being pre-paid.
• Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned.
• It is quite possible that some lenders may levy documentation or consultant charges.
• Registration of mortgage deed.

Your bank will assess your repayment capacity while deciding the home loan eligibility. Repayment capacity is based on your monthly disposable / surplus income, (which in turn is based on factors such as total monthly income / surplus less monthly expenses) and other factors like spouse's income, assets, liabilities, stability of income etc. The main concern of the bank is to make sure that you comfortably repay the loan on time and ensure end use. The higher the monthly disposable income, higher will be the amount you will be eligible for loan. Typically a bank assumes that about 55-60 % of your monthly disposable / surplus income is available for repayment of loan. However, some banks calculate the income available for EMI payments based on an individual’s gross income and not on his disposable income.

The amount of the loan depends on the tenure of the loan and the rate of interest also as these variables determine your monthly outgo / outflow which in turn depends on your disposable income. Banks generally fix an upper age limit for home loan applicants.

The security for a housing loan is typically a first mortgage of the property, normally by way of deposit of title deeds. Banks also sometimes ask for other collateral security as may be necessary. Some banks insist on margin / down payment (borrowers contribution to the creation of an asset) to be maintained / made also.

Collateral security assigned to your bank could be life insurance policies, the surrender value of which is set at a certain percentage to the loan amount, guarantees from solvent guarantors, pledge of shares/ securities and investments like KVP/ NSC etc. that are acceptable to your banker. Banks would also require you to ensure that the title to the property is free from any encumbrance. (i.e., there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely).

Some institutions ask for 1 or 2 guarantors.

Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount. Some institutions do not require the co-applicants to be co-owners of the property to be purchased.

Buying your own home is a big financial responsibility. Taking a mortgage for the same seems like such a big burden that most people tend to shy away from taking this step. However, there are loads of benefits that home loans offer as well that should serve as an incentive if you are planning to buy one. Here are some direct benefits of taking a home loan.

Tax benefits- The EMI for your mortgage loan has two components, the principal and the interest.

INTEREST PAYMENT

According to the dictates of the Income Tax Act, you can claim benefits under Section 24 on the interest payment you make. The processing fee that you paid at the time of taking a loan or a penalty paid to close the loan prematurely, can also be claimed under this section. The maximum limit for deductions for property (under the head of interest payments) that is self-occupied can be Rs. 1.5 lakhs.

PRINCIPAL PAYMENT

For principal payments you can claim deductions under Section 80 C. However, the maximum deduction that can be claimed under this section is Rs. 1 lakh along with other investments such as insurance premiums, ELSS, school fees, etc. Deductions on stamp duty and registration fee can be claimed in the financial year in which the property was purchased. Please remember, all these deductions are valid only if the property is self-occupied. Also, all deductions are reversed if the property is sold within the first five years of purchase.

Other benefits of taking a home loan

IMPACTS YOUR CREDIT SCORE

A loan that is backed by an asset is called a secured loan. A home loan is a secured form of loan and such loans have the largest positive impact on your credit score when they are repaid on-time.

A VALIDATION OF YOUR PROPERTY

If Bank A agrees to give you a loan on the property of your choice, it means it is satisfied with the evaluation process of your home to be and gives its stamp of approval on the property. A lender approved property is always easier sell, if and when required.

Reverse Mortgage is a loan that enables elderly homeowners to use their home's equity without selling their home or moving from it. A lending organization makes a check out to the homeowners each month.

The general consensus seems like if you can afford a 15-year fixed mortgage, you should go for it. The interest rate will be lower, you own your home in half the time, and the payments aren't actually that much higher. But what if you just look a 30-year fixed mortgage and had the discipline to pay enough extra each month to equal the 15-year payment?