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7 Basics Of Home Loans Every Woman Should Know About

Posted: February 5, 2020

Women are often unaware of home loan procedures despite wanting to own a home. Here are seven home loan basics every woman should know.

For most of us, owning a home is considered the last rung of the societal ladder that we are expected to climb. It commences from getting good education, getting married, starting a family and settling down.

Our parents’ generation was the one who waited till their 30’s or 40’s to accumulate enough savings to buy a house. This was, then considered a pinnacle of success. However, with the widespread availability of loans, it is easier now, to buy a home in our 20’s and pay it off as we go along

And all of it seems so simple, everyone around us seems to be taking a home loan. But how many women really know exactly how a home loan works? Before taking a home loan and parting with our money, it’s important to do our homework.

So let’s take a look at some home loan basics that every woman should know:

What is a home loan?

A home loan is the money you borrow from a bank to buy your home, at a certain interest rate while agreeing to pay it back over a period of time. You pay the money back slowly over as many years as you agree with the bank. This is known as a loan tenure and you pay the loan back in the form of EMIs (equated monthly instalments)

Can anyone take a home loan?

No. There are some eligibility criteria that you need to meet:

You need to have a source of income.

Regardless of whether you are salaried or run your own business, you need to have an income source you can demonstrate. Additionally, there is a minimum income cutoff (this varies across banks), below which you’d be ineligible for the loan.

If you are salaried individual, you need to provide proof of three years of work experience in the form of salary slips. Your in-hand salary will also determine the amount of loan you are eligible for. The EMI will also depend on the same.

For business owners, your business needs to be at least five years old for you to be considered eligible for the loan.

Age Limit

This varies across different banks but a general rough estimate would be around 20 to 60 years. Your age determines the loan tenure (this reduces as the age increases)

So for someone who is 25-30 years old, the tenure can be up to 30 years whereas, for applicants above 45, the maximum tenure would be 20 years.

There are some other criteria too. These generally include additional incomes, any existing loans you’re paying off and the like.

The components of a home loan

It is divided into principal and interest.

The principal is the total amount of money you have borrowed from the bank. After a certain amount of time it the amount of money that remains to be paid off.

The interest is the amount of money the bank charges you to use the principal as a way to compensate for the money it has lent to you.

What you would be repaying to the bank is higher than the amount you borrowed from them.

What is interest rate?

It is the amount of money charged to you annually by the bank. In other words, it refers to borrowing charges. It is expressed as a percentage of the remaining principal amount. The interest rates varies across the world, with Indian banks usually charging about 8-10%.

There are two types of interest rates: fixed and floating.

Fixed interest rate

A fixed interest rate is one which is not going to change throughout the entire tenure.

For e.g., if you take a loan of 50 lakhs at an interest rate of 10% for 20 years, then your interest rate going to remain at 10% for the entire duration.

Advantages of fixed interest rate

  • Since the amount is fixed, you know exactly how much you need to pay for the entire duration of your tenure. This allows you to plan out your finances, especially if you like to plan down to the last penny.

Disadvantages:

  • You may lose out on quite a bit of money if the lending rates fall, because you won’t be able to avail the benefit.

Floating interest rate

A floating rate is one which varies over the years, subject to the lending rates of the bank.

Advantages:

  • If the rate falls, you pay less interest! (Woohoo!)

  • At the outset, these rates tend to be cheaper than the fixed rate option.

Disadvantages:

  • Obviously, if the rates increase, that’s bad news for you. But overall there is less chance of this happening.

What is EMI? How is it calculated?

This is one of the home loan basics that seems very simple, but can be misleading if you don’t pay attention to it. EMI stands for equated monthly instalments, and is a fixed amount of money that you (the borrower) has to pay back every month to the bank.

It can be calculated in two ways – the flat rate EMI and the reducing-balance EMI.

Flat rate EMI

This means the interest is calculated on the original loan amount for the entire tenure. It doesn’t take into account the fact that monthly payments will reduce the total outstanding amount. Although more commonly applied to personal and car loans, flat rate EMI can be used in home loans too.

Example: Let’s say you have taken a loan of 50 lakhs (the principal) at an interest rate of 10% for a period of 20 years (the loan tenure). So your EMI would be calculated as:

[principle + interest]/total number of months,

i.e. [5000000 + (0.1 x 20 x 5000000)] / (20 x 12),

which comes to Rs. 62,500/- per month.

Out of this, Rs. 41,667/- is meant to go towards the interest component, and the rest of it towards the principal amount.

In flat rate EMI, this proportion does not change till the end of your loan tenure. Thus the effective interest rate will ultimately be higher than the flat rate that is initially quoted.

Reducing-balance EMI

Each month, the interest will be calculated based on the outstanding loan amount. The EMI that you pay every month will be used to pay for the interest, and the remaining amount will be used for repayment of the principal. Therefore, after payment of every EMI, the outstanding loan amount will reduce bit by bit.

Example: In your loan of 50 lakhs, the EMI at the beginning is Rs. 62,500/- per month. However, as you keep paying the EMI, the interest component will reduce progressively, and more money from your EMI will go to the principal component.

So which one is better? Obviously reducing balance EMI!

Now you must be thinking, why would anyone even go for a flat rate EMI? This is because the flat interest rates are usually lower than balance-reducing rates. Flat rate EMIs are often used as marketing gimmicks by quoting low interest rates to uninformed customers. They think they are getting a good deal, but actually end up paying 1.7 to 1.9 times higher than the reducing balance rate.

Can I borrow the entire amount?

Unfortunately, no.

Most banks require that you pay at least 10-20% of the total cost as the down payment.

That said, it’s always better to pay as much as you can for the down payment, and borrow as little as possible. This way, you don’t end up paying an exorbitant amount as interest.

How does paying-off work?

This is one of the home loan basics that many people misunderstand. When you start paying your EMIs, the money first goes towards the interest that has been building up, and then is used to pay for the principal amount. (See Point 4.)

You can opt to pre-pay your home loan, so make sure that you take a loan with no foreclosure charges.

Are there any tax benefits?

This is one of the home loan basics that everyone is interested in.

People who have taken a home loan are entitled to tax benefits under Section 24, Section 80C, and Section 80EE. These deductions are available on the repayment of both principal amount as well as interest.

Under Section 80C, a maximum tax benefit of Rs 1.5 lakhs is allowed, irrespective of the year that the payment was made. You can also claim deductions for registration fees and stamp duty charges. The benefit for repayment of principal loan amount can be claimed once the construction of the house has been completed.

Under Section 24, you can avail benefits for the interest that you pay towards you loan, up to a maximum of Rs. 2 lakhs, This you can claim it on a yearly basis.

Under Section 80EE, you can avail a deduction of up to Rs. 50,000 for the interest that you pay on your home loan – but only if you are a first time buyer.

If I take a home loan, does my home belong to me?

Technically, until you’ve paid off the last penny, your home belongs to the bank. The home that you are loaning is used as security for the bank, and the original papers of the sale deed are kept with them.

So if you are unable to pay your EMI for several consecutive months, there is a high chance that your home will be seized by the bank.

Do you have any points to add? Let me know in the comments below!

A version of this was earlier published here.

Picture credits: YouTube

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