Understanding Loans, Interests and Repayments
When you think of a home loan, we are sure you also think of calculations, huge EMIs, interest, repayment periods, money management and a bunch of other inconveniences that come along. Buying a home becomes more like a daunting plan than an exciting one. However, with the right methods and money management, buying your dream home can become a breezy process.
Let's get started!
What are home loans and how do they work?
In simple words, you borrow an amount of money from banks or any other sources. The borrower must pay back the loan amount with interest in easy monthly instalments or EMIs over a period of time that can vary between 10-30 years depending on the nature of the loan.
Lenders require a certain 10-20% of the home's purchase price as a down payment. It's called 'one's own contribution.'
How much should I save for a down payment?
It's no secret that we don't like debt. Car loans, student loans and credit cards debt can already tie up your income.
We'd suggest borrowers to self-finance most of the amount by themselves. Plan out an arrangement where you can build maximum down payment and less loan to keep your EMIs minimal. We can help you in planning that.
How to plan?
The million-dollar question; "How should I save maximum for the down payment?"
Well, don't worry. We have got you covered.
1) Determine how much you can afford each month
The rule of thumb is to spend no more than 25% of your monthly income on your mortgage.
Write down how much money you (and your spouse, if applicable) bring home. Multiply it by 0.25 to find your monthly mortgage amount.
2) Use your monthly mortgage payment to arrive at a total mortgage amount
When it comes to the type of mortgage you select, we recommend a 15-year fixed rate. This will help you save lots of money compared with the 30-year option.
Spend some time with the mortgage calculator. Input the different numbers into the home value and down payment section
3) Aim for 10% & 20%
We said this earlier too, decide a percentage of your down payment, try going higher and set a savings goal in our app. We'll keep reminding you about the progress, how far you have reached and how can you plan to achieve your set goal.
Important factors to consider when planning for a home
Principal | This is the amount of money you will be borrowing from the bank or financial institution |
|---|---|
Duration | How long you will be paying back the loan. Depending on the nature of your expected income, you can select a period that suits you. |
Interest | The bank or financial institution charges interest in exchange for its money lending services. The rate of interest is dependent on the amount of principal and the duration for which you will be repaying the loan |
EMI Amount | You will be paying monthly instalments for the duration of your borrowing, until the end of the loan period. |
How to close your home loan quickly?
For Indian consumers, owning a home has been regarded as one of the biggest life goals. However, this exciting experience can also become a big financial commitment. If you have also signed up for a home loan to achieve this dream, we have some solutions for you to pay off your home loan faster.
1) Reduce your loan tenure and negotiate with the bank for lower interest.
Yes, it's possible! Also, it’s always better to make a prepayment of the loan whenever possible. So, a quick repayment of the principal amount leads to saving on interest pay-out
2) Of course, you must be getting increments or bonuses.
As a result, you can increase your EMIs with the rise in income. Even a small increase in EMIs, depending on your loan and tenure can make a big difference and can bring down the remaining loan tenure.
3) Taking home loan top-up helps:
Not many people have heard of taking home loan top-ups. Lower in interest cost than personal loans and credits cards, you can seek top-up loans from their housing finance companies to repay your loans early.
We hope this blog acts as a guide if you're planning to buy a home.
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Written by Gouri Chowbey for Finzard
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