Monday, June 24, 2024

Home financing 101: Understanding mortgage rates

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For any individual, owning a home is of great significance. After all, we all wish to own a dream home one day.
Interestingly today it does not take as long to purchase a home like previous times. Previously homebuying was generally done at a later stage, towards the retirement period. One had to make sure they have enough savings before making a purchase.
However, presently, this is not the case. There are plenty of home loan options available from banks and other lending institutions. With the help of such facilities, one does not need to pay a huge amount as a downpayment.
A discerning homebuyer can fund anywhere between 40-90% of the overall residential price with the help of lenders. The remaining he/ she has to pay as a down payment.  With the home mortgage option, it becomes really simple and convenient to own a home. Meanwhile, it is also important to follow certain steps prior to opting for the right home loan.

Research the market well: Before zeroing down on a home loan option, do detailed research in the market and select the option that is aligned with one’s needs. Also, learn about the lending rates. More about lending rates will be discussed in the following section.
Check your home loan eligibility: Before applying for a home loan, one should understand what exactly is their home loan eligibility. Based on the same one should plan their home purchase. There are numerous calculators available online, via which one can check their eligibility.
Keep a high credit score: To easily secure a loan, it is very important to maintain a high credit score. It is advisable to keep a credit score higher than 750 to easily access home loans.
Read loan agreement properly: One should read the loan agreement properly and understand all the terms & conditions.
Keep all the documents: In India applying for a home loan also requires a lot of documents that need to be approved. Hence for homebuyers, it is essential to keep all the required documents handy. This can save a lot of time.
Home Loan Rates
An important aspect of a home loan is the rate. The home loan rate is the percentage of the principal amount charged by the lender to the borrower, for using the principal. Based on the home loan rates, the Equated Monthly Installments (EMI) is calculated.  Home loan rates vary from lender to lender. Meanwhile, there are a few other external factors that dictate home loan rates such as the repo rate by the RBI. If the repo rate is increased, liquidity in the market reduces, and home loan rates rise naturally. On the contrary, if it is reduced then liquidity rises and rates are subdued.
Likewise, there are other factors as well that can impact rates. For instance, credit score. A higher credit score means a better financial history & higher creditworthiness. This will naturally result in lowered rates.
Similarly, a high LTV (Loan-to-Value) ratio means increased risk and this will make the bank charge higher rates. In contrast, if the LTV is less, then banks might charge lower rates.
Other factors such as property location can also play a significant role in deciding the home loan rates. If the property is located in a desirable location with enhanced connectivity and improved infrastructure, then naturally it will have better resale value. In such a case, the interest rate will be less. However, if the location is not desirable, then the resale value will be undermined. This might prompt the lender to charge a higher rate.

(The author is Suren Goyal, Partner, at RPS Group.)

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