Home loan: Don't forget to ask your lender these questions before applying

Buying a home is a huge financial step for you and your family, and for most first-time buyers, a home loan is necessary to achieve this goal. Given the long-term commitment of a home loan, understanding its terms and conditions is crucial before you apply. This understanding helps you determine if the loan suits your needs, potentially saving you time and money.

Before applying for a home loan, make sure to ask your loan provider these key questions:

Interest rates and loan types:

 Understand the difference between fixed and adjustable interest rates. Fixed rates offer stability, while adjustable rates can be lower initially but fluctuate over time. Ask about the specific interest rate you qualify for and how it compares to their advertised rates.

Loan types: Explore various loan options like individual loans, joint loans, or those specifically for salaried individuals or women borrowers. Each might have unique eligibility criteria and interest rates.

Loan tenure: The loan tenure significantly impacts your monthly Equated Monthly Installment (EMI). Inquire about the maximum tenure offered and explore the implications of a shorter or longer repayment period on your EMI and total interest paid.

Prepayment options: Check if the lender allows prepayment of the loan without any penalties. This flexibility can help you save interest by making lump-sum payments towards the principal.

What’s the APR for the home loan?

The Annual Percentage Rate (APR) encapsulates not only the interest rate but also any additional fees or charges associated with the loan. It offers a holistic view of the loan's actual cost, facilitating effective comparison between various loan proposals.

Adhil Shetty, CEO of Bankbazaar.com, explains the concept with an example.

Picture this: A lender offers a loan of Rs 100,000 at an annual interest rate of 9%. In addition, there is a processing fee of Rs 2,000. In this case, the total cost of borrowing would be Rs 9,000 (9% of Rs 100,000) plus Rs 2,000 (processing fee), which equals Rs 11,000. To calculate the APR, we will multiply the total cost of borrowing (Rs 11,000) by the number of days in a year. With 365 days in a year, the APR for this loan would be 12.83%.

He states, "APR is not the same as the interest rate charged on a loan. The interest rate denotes only the cost of borrowing money, while APR encompasses the total cost of borrowing, including any fees or charges associated with the loan."

Do lenders allow transfers of the remaining home loan balance?

Ratan Chaudhary, Head of Home Loans at Paisabazaar, confirms that many home loan lenders permit the transfer of an existing home loan to another lender for the sake of securing lower interest rates or other advantages. However, the approval of any home loan balance transfer application is contingent upon various criteria, including the borrower's current credit profile, the remaining tenure of their home loan, and the status of the property in question.

What is the home loan disbursement and repayment process?

"For properties ready for immediate occupancy, lenders generally disburse the entire loan amount in a single instalment, initiating repayment through EMIs. In contrast, for properties under construction, the loan amount is released in instalments, reflecting the progress of construction, with several repayment alternatives offered," says Ratan Chaudhary.

"Throughout the loan tenure, borrowers should monitor their repayment status diligently. After full repayment, the lender releases any mortgage or lien on the property and issues a 'No Objection Certificate' (NOC)," advises Adhil Shetty.

What must customers do when lenders attempt to sell them other financial products alongside the home loan?

Ratan Chaudhary and Adhil Shetty caution that while purchasing property insurance is mandatory for home loan applicants, lenders cannot compel applicants to buy additional financial products. Applicants should perform their due diligence and opt for those products only if they align with their financial objectives. Shetty advises, "It is crucial to understand the product thoroughly. Inquire about the coverage, benefits, terms, and conditions associated with these products. Consider your financial situation, existing insurance coverage, and specific needs before making any decisions."

How can potential homebuyers protect themselves from scams?

"Seek legal assistance to verify the legality of the property documents, including land titles, approvals, and clearances from local authorities. Ensure that the property is free from any encumbrances or legal disputes. Banks sanction loans on approved properties, so checking whether a bank loan is available can provide some indication of whether to proceed or reassess your decision," Shetty advises.

Home loan applicants must aim at affordability

While a wide range of home loan options is available, affordability plays a significant role in your decision-making process. It's essential not only to manage the fixed monthly EMIs but also to ensure they fit comfortably within your living expenses. Take into account the overhead costs beyond the monthly EMI and ensure a consistent income flow to cover any unexpected emergencies. Therefore, although you may have the option to buy a house you like in your preferred location, the ability to afford the home loan remains critically important.

Key pointers

— APR provides a comprehensive cost measure, essential for comparing loans.

— Balance transfers can offer financial benefits but depend on your creditworthiness and property status

— Disbursement and repayment terms vary with property status and lender policies

— Evaluate additional financial products based on your needs and goals, without feeling pressured.

— Legal verification and checking bank loan approvals can safeguard against scams