Dreaming of being the owner of a beautiful home. Funding from your savings to convert this dream into a reality would be a challenge. A home loan would be of help as it is a low-cost loan. There are two components to a home loan. One is the principal and the other is the interest. The principal is the initial loan amount provided by the financial institution, and interest is the cost attached to the loan amount. If you do not plan repayment of a home loan meticulously, it could burn your pocket.
Home loans are available with a very flexible tenure that extends up to 30 years. Long tenures are tempting because the EMI will be comfortable and well within your budget. Paying the Home Loan Interest Rates for years would step up your overall repayment by 2 to 3 times. The diligence lies in finding ways to reduce the interest outgo.
Some financial institutions have the option of step-up and step-down EMI. Step-up EMI is ideal for youngsters who have just started their career. They can opt for the maximum tenure with step-up EMI. In the beginning, the EMI will be lower and as and when the income grows, a higher EMI in proportion to the income will be fixed. This will enable reducing the tenure along with the interest on the home loan. Step-down EMI is suitable for persons who decide to avail of a home loan during the fag end of their career. Such persons will not be provided with a tenure as long as 30 years. The residual service will decide the tenure. In such cases, the EMI will be kept high in the initial years and will reduce gradually as their retirement approaches.
Find here below a list of 7 proven tips to reduce the interest element of your home loan.
#1. Look out for the best interest rates in the market
Before applying for a home loan, you should do thorough research for the market’s prevailing home loan interest rates. With players flocking the market, you have several attractive interest options like ICICI Home Loan Interest Rates, which is at 6.75% p.a. along with luring offers that could fetch you an economical deal. Several websites have collated the prevailing interest rates as well as other charges on a single page for your convenience. You can browse through these websites online for a comparative study. You should also compare the charges collected before and after the sanction of the loan like processing charges, documentation charges, Cersai charges and prepayment charges. All this will add up to the cost of the loan. SBI Home Loan Interest.
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#2. Choose the tenure wisely
The financial institutions provide flexible repayment options extending up to 30 years for home loans. ICICI Home Loan provides a maximum tenure of 30 years. The EMI fixed will be lesser for longer tenures. While you are checking your eligibility, you may find that a shorter term will not fetch you the desired amount. Fixed Obligations to Income Ratio (FOIR) indicates the capacity to repay the proposed EMI without stressing your finances, and this has to be kept at 40% to 50%. If longer tenure only can fulfil this condition, then initially opting for a longer tenure is inevitable. But indeed, there are ways to reduce the home loan interest subsequently. If you can afford to opt for a shorter tenure, it is ideal for lowering the home loan interest.
#3. Make Periodical Part Prepayments
It is prudent to make periodical part prepayments towards a home loan to reduce the tenure, which will, in turn, reduce the overall cost of the loan. Ensure to start making part prepayments during the initial years itself. You can observe that even after making prompt repayments, the outstanding liability will almost remain the same. During the initial years, a significant portion of the EMI will be adjusted towards the interest and a small amount towards the principal. Making part prepayments during the initial years will help reduce the principal portion considerably and decreasing the interest outgo.
Check for prepayment policies before you avail of a home loan. Some of the lenders collect charges for every prepayment that you make, while some of them do not provide the option of part prepayments. There is no prepayment charge for ICICI Bank Home Loan if the prepayment is made out of own funds.
#4. Increase the down payment
Financial institutions fix a margin for home loans, ranging from 10% to 90% of the property’s market value. The margin fixed indicates your contribution by way of a down payment. If you opt for a higher down payment, you will have the advantage of a lower rate of interest and be able to clear the home loan faster. This will impact the overall cost of the loan while reducing the EMI. With a reduced EMI, you will be able to manage the repayments without any financial stress.
#5. Opt for a Home Loan Overdraft Facility
Some banks provide a Home LOan Overdraft facility wherein you can deposit any surplus funds in addition to the regular EMI that will bring down the principal proportionately. This will help in reducing the interest outgo to that extent and also reduce the tenure. The advantage of the overdraft facility is you can deposit surplus funds when available and withdraw when required. Make sure that you will work with the sanctioned amount only in a dire emergency. Else, it will not serve the purpose.
#6. Negotiate with your lender for better rates
As far as possible, try to avail of the home loan from your existing banker. With a good track record and relationship with your current sanctions draw banker, you will be in a favourable position to negotiate for a better home loan interest rate. A lower interest rate will result in lower interest outgo.
#7. Balance Transfer
If you are paying a higher rate than the prevailing rate in the market for the home loan, consider transferring the outstanding balance in the existing loan to a lender who is offering a better rate.
As far as possible, look for ways to reduce the loan tenure rather than just reducing the interest payment if you intend to minimise the overall cost of the loan.
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