Prepare yourself for Home Loans
Home loans or mortgage will be the biggest loan an individual will usually take in his life time. Due to the large amount of the sum even a tiny percentage point in interest rate can cause a difference of huge sums of money. This makes it a lot important to look for the best interest rates you can get for your home loan.
Build your credit history
Interest Rates for Home Loans depend on a varied list of factors. The usual factors like the loan amount you are looking for, the tenure of loan and the purpose of loan are important but most important is your individual profile. So the process of getting the best available rate doesn’t just start the day you think about purchasing your new home but the day you started your financial live.
Now days banking institutes are very sophisticated. From the day you opened your first bank account, your credit file starts taking shape. When you took your first car loan or other small loan you started building your credit history. When you were paying the instalments you were getting the brownie points which will help you in future to secure bigger loans. Your first credit card and your habit of paying off your dues on time were marked as big plusses in your credit history. But when you were late in paying your bill or missed an instalment a negative mark was marked as well.
All the banking and financial institutes have access to your credit file. When you apply for loan they check your credit history, they look at your financial standing. Your pay slips, your ability to pay back instalments everything helps. But if you have a strong history of paying back loans you are good as gold. From a bankers point of view your boss who may have double your salary but never took a loan is not good as you if you have good credit history. Having credit cards is not all negative; it helps bankers to assess your financial discipline.
Decide your Loan to Equity
This is another factor that you should start thinking about much before you go shopping for your first Home Loan. Loan to equity is the percentage of total value of the property you are going to ask the bank to loan. No bank is going to give you hundred percent loan to buy the property not at least after the recent banking crisis. You have to fund some part of your home from your pocket. Bigger the percentage you are willing to fund better the interest rate you will get, so start saving for that initial deposit.
Start Shopping for Loan – Pre-approval
Now you have option to go for a pre-approval or find the property first. Many banks, depending upon your financial status, will be ready to approve you say X amount of loan. This gives you the benefit of knowing your budget. You will be saved from disappointment if you really liked a property but bank is not ready to fund the amount. On the other hand if you have already selected a property you may be in a good negotiating positions to bargain for a better rate. Banks are known to reserve the best deals for immediate disbursement cases as there are targets to be achieved.
Shop around and bargainYou may think bargaining is just to be done with street-hawkers but not with blue collared bankers, interest rates advertised are fixed. No you are wrong, if you have good financial standing, a good credit history, you are a safe bet for the bank. Banker will be ready to offer you a better rate to win your custom, so bargain. Not only from the perspective of interest rates, but also the eligibility amount it is advisable that you shop around and play one provider against another. A home loan is large purchase decision 0.2% knocked off your interest rate over a 20 year home loan can typically save you half a lakh! Apart from interest rates, also look out for various fees and charges - processing fees, pre-payment charges, legal fees, valuation fees and other hidden costs. So haggling is worth the trouble. Summon up all your bargaining powers and let banks compete for your business.
Avoid falling for teaser rates
Some banks come up with teaser rates. That may look excellent but are for short term only. Considering that mortgages are for long term usually these may not be as attractive on the long run. Consider the State Bank of India Home Loan scheme (popularly called the 8% scheme) is very good scheme but surely costs much more than 8% except in the first year. The success of this scheme has ensured that other banks also offer what bankers call 'teaser rate schemes a low initial rate but a higher rate after the first couple of years. Evaluate the impact on overall cost of such rate changes over the entire loan tenure.
Fixed or floating/variable interest rate
In some cases, a "fixed rate loan" may remain fixed only for a certain period of time, as the bank may have the right to arbitrarily change even the so called 'fixed rate'. Do your due diligence before signing anywhere. Likewise, if you choose a floating rate loan, check if the rates of your chosen lender have actually floated down in the years when interest rates were dropping like a stone. There are a lot of not-so-transparent banks in the market who float the rate up when the industry rates are going up but fail to float the rate down when the industry rates go down. To know whether the bank you are talking to offers 'transparent floating rates', ask for the bank's track record - especially in the falling interest rate regime of 2002-2003. Past behaviour is a fair indicator of how the bank will behave in future - whether it will pass on the benefit to you if and when the interest rates start moving down.