Finance

THINGS TO CONSIDER BEFORE TAKING A HOME EQUITY LOAN

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Home equity loans (sometimes referred to as term loans or cash-out refinancing) allow homeowners to ‘unlock’ the monetary worth of their homes, allowing them to take out a larger loan. For example, a DBS loan is provided to help asset-rich but cash-strapped seniors pay their retirement. Seniors with fully paid private residential homes can borrow against their houses to supplement their CPF retirement funds. Here are some aspects you should know before applying for a home equity loan.

ELIGIBILITY

Before applying for a home loan you should know about your eligibility which mainly depends on your repayment capacity. It mainly depends upon the monthly income of the owner, sometimes on the spouse’s monthly income and stability of the income. For the salaried person, you should have 3 years experience and for the self-employed person, you should have 5 years experience. Besides that eligibility also depends on assets, liabilities, etc. Generally, a bank assumes that 50%of your total monthly income is available for repayment. Bank also fixes an upper age limit for application which is 32-62for salaried and 25-70 for self-employed. And the next important point is that you should be an Indian resident.

The next point is what is the maximum amount one can get. Generally 10-20%of the price has to be paid at first as “One’s own contribution”. The rest 80-90% will be paid by the bank according to your eligibility. But you should pay as much as the one-time contribution as you can.

REPAYMENT

Now about the repayment, there are two types of interest rates for home loans- one is fixed and the other is fluctuating. For fixed the interest rate is unchanged for the total period until the reset date comes. And for fluctuating the interest rate changes depending on the market scenario currently which is based on MCLR, which is the cost of lending. Therefore whenever MCLR changes, the home loan interest rate changes too. So when the MCLR reduces your interest rate reduces and the EMI of your loan also decreases.

EMIS

Then you should know about EMI which is calculated based on your loan amount, interest rate, and loan period. Actually, if there is a higher interest rate EMI is higher. But the significant factor is the repayment period. If for the same interest rate the period increases the total repayment increases than for the lesser period as the interest adds every month whereas the difference between the two EMI is very less. But it can’t mean you have to choose a short period because it means a higher EMI. So you can choose that period by which you can repay comfortably.

For the loan period, it will be a maximum of 30 years and there is no margin for the minimum time limit.

DOCUMENTS YOU NEED

For applying for the loan you should have some documents which you have to submit. Though it changes from lender to lender there are some common ones-

  • KYC documents like the Aadhaar card and pan card.
  • Address proof like utility bills.
  • Identity proof.
  • Passport size photograph.
  • Income proof like Form 16 or salary slips for the salaried and last 6 months bank account and financial statements for self-employed.

You can close the loan ahead of its original period. If you are on a floating interest rate there is no change for that but if it is a fixed interest rate, a charge may be applicable.

You can also pay a partial amount along with the regular EMI which reduces the principal amount and the interest rate gets calculated on the reduced principal. The higher the repayment amount, the more will be your savings.

It is always better to have insurance either a pure term insurance plan or a mortgage insurance plan for an amount equal to the loan amount for a specific period. It is not compulsory but such a plan but it is a better option not to let it fall on your family in your absence.

CONCLUSION

In addition to every point, you should also know about the home loan agreement, which is the legal document and contains the terms and conditions of the loan. Since the documents remain as legal documents in force the whole period you should read it carefully and then sign them. So, knowing about the clauses will help you to enforce your rights in times of need.

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