How To Plan Your Finances Before Applying For A Home Loan?
Owning your own home is the dream of every Indian, and home loans have helped a lot in making this dream into a reality. Home loan interest rates have become quite affordable recently, resulting in an increased demand for the same. However, before you make this dream a reality, there goes a lot of financial planning that you need to do. There are some key parameters that you need to consider before going for a home loan.
1.Credit Score
This is the very first step that will help you in planning your finances. Your credit score determines whether you are eligible for a loan or not. It also helps you determine the rate of interest at which you will get your loan. A higher credit score gets you the lowest interest rate, whereas a lower credit score will get you a higher interest rate. If your credit score is very low, you may become ineligible for a loan. So, it is important to maintain a good credit score.
2.EMI Affordability
Once you know your credit score and the interest rate of the loan you are eligible for, you can determine your EMI affordability. Using the Home loan EMI calculator, you can determine every month instalment you need to pay for the loan. If the payment is going beyond your budget, you can increase the tenure of the loan and if you can afford to pay more, then you can also decrease the tenure. Decreasing the tenure will also help you save on interest on the loan.
3.Closing or reducing existing debts
If you have other loans running in your name, your home loan eligibility would reduce, i.e. the loan amount that you can avail of would be limited. To avail of a higher amount of home loan, try to close some of your existing loan accounts or make a prepayment towards them to reduce their outstanding liability.
4.Emergency Fund Planning
After you have determined your EMI payments, it is very significant to plan for any unknown events that may occur in your life. In the case of premature death, loan repayment might become a burden on your family. So, buy an insurance policy along with the home loan to ensure loan repayment even if you are not around.
5.Down Payment for the House
Most banks and financial institutions require the borrower to pay a certain amount of the property upfront to sanction the home loan. This can be up to 20% of the property value. So, if you are buying a house worth ₹1 crore, you may need to pay a down payment of around ₹20 lakhs. If you want, you can pay a higher sum also and reduce your loan amount and the home loan interest rate payments. Additionally, you will have to pay stamp duty charges also for the property. So, you need to have this amount ready before applying for a home loan.
6.Tax Implications
A home loan offers some tax benefits which can help you plan your taxes. You can avail exemptions up to ₹2 lakhs per year towards the interest payments for the home loan. Moreover, the principal that you repay is allowed as a deduction up to Rs.1.5 lakhs under Section 80C. So, you can use these tax-saving benefits to reduce your tax liability.
To Sum it Up
Owning your own home is a dream for every Indian. If you don’t have your finances planned beforehand, repaying the loan can become challenging. So, consider all the aforementioned aspects before you avail of a home loan. This would ensure that you not only move into your dream home but you can also afford it.
