CHOOSING THE RIGHT HOME LOAN

Choosing the right home loan is not an easy task. With so many different types of loans and lenders to select from, it would be easy to simply go in for the loan that offers the lowest interest rate. However, that is not enough. You must look at other features before you decide on a HFC. Sometimes, you may find that the HFC you have chosen which also has the lowest interest rate- charges three to four per cent as termination fee, some thing not mentioned earlier.

Here is a checklist of what you should look for while going in for a home loan:

Rate of Interest: Since amounts are large and repayment periods quite long, the interest component assumes great significance. Typically, the interest component over a 15 .ear period is larger than the principal. Obviously, one would prefer the lowest rates, subject to all other features being equal.

Calculation of Interest: Lending institutions tend to calculate interest payments based on a reducing balance method. This means that your interest calculations take into account any reduction in principal. If your bank calculates on a flat basis over the tenure of the loan, you might end up paying a much higher effective rate than what is quoted.

It also makes a difference whether the reducing balance is calculated annually, half yearly, quarterly or monthly. Based on the principal amount, loan tenure, interest rate and method of calculation, it is possible to calculate the Equated Monthly Installments so that the amount paid every month remains the same for the entire duration of the loan. Both interest and loan repayment are accounted for in the EMI. This becomes the best way to compare two loans from different companies,

Fixed and Floating interest rates: It is very important to know the difference between the two. A floating or a variable rate is one where the interest rate charged by the HFC on your loan changes with respect to the rates in the market over the tenure of the loan. In the case of the fixed interest rate, the rate charged by the financier remains constant over the tenure of the loan.

Processing and other charges: This is the amount of money charged upfront by the lending institution in order to process of the application. Processing charges vary from 0.8 percent to 2.0 per cent, while administrative charges are up to 1 per cent of the loan amount. Commitment charges are also levied if you do not withdraw the loan amount for an extended period after borrowing the sanctioned amount.