Home Finance Loan

By: EconomyWatch Content   Date: 5 January 2010

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With the growing presence of several home loan finance schemes, buying a dream home has become simpler. There are so many tempting interest rate options that compel potential borrowers to opt for a home loan. However, home loan economy is a complex space in itself. One needs basic understanding of individual requirements and market trends to strike a good home loan deal.

 

Home Finance Loan: Catch-22 Situation

For home loan finance, choosing an interest rate is the catch-22 situation. Fixed interest rates are high but they offer financial relief. However, floating or adjustable rates are low but they come with an inherent risk.

 

Generally, individuals who opt for long term loan prefer fixed rates. This prevents the borrower from suffering consequences of a fragile market scenario where the interest rates can shoot up any time. With a fixed rate loan, people assume that they have locked in for a single interest rate through out the term of loan. However, even fixed interest rates are not 100% fixed.

 

Most of the lenders include a reset clause in the loan contract. This clause empowers them to reset a fixed interest rate after a certain period of time, like after five years. Lenders require this clause to remain profitable. In countries, like India, even the public sector banks have this clause; however it is underplayed during the contract signing process.

 

Thus, one should look for any such clause in the loan contract.

Home Finance Loan: Essential Considerations

Before deciding to purchase a home loan finance scheme, consider the following facts:

 

  • In conformity with international standards, the monthly installment for a home loan should not exceed 40% of the net monthly income. An individual's net monthly income is the disposable income after deducting statutory financial obligations such as insurance premium, tax and mutual fund investment. However, it is advisable to keep the loan installment below 25% as one may require reserves for financial or medical emergencies.

 

  • Many people prepare a loan plan considering potential hikes in their income. However, such overestimation or inflated projections at this stage can lead the borrower into troubled waters. It is smarter to play a safe game while planning for home loan finance.

 

Home loan is a long term obligation. This popular English proverb justifies the role of perfect planning in home loan finance - "if you are failing to plan, you are planning to fail."


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