Also known as a mortgage, a home loan is the amount of money borrowed from a financial institution to buy or maintain a home, land, and another real estate. Taking a home loan ensures that you don’t suffer a liquidity crunch by using your money to buy a home. It also ensures that you don’t lose your investment to corrupt deals; before a bank can approve your loan, they do their due diligence to ascertain that the project they’re financing is legitimate. However, taking a loan without prior consideration can cause you trouble. Below are the mistakes you should avoid when taking a home loan.
1. Failure to understand down payments
The amount you set aside as a down payment determines the amount a lender will lend you and the type of mortgage that best suits your needs. Depending on your savings, budget for your new home, and income, decide the amount to designate as a down payment.
A large down payment gives you a lower loan-to-value ratio (LTV), making you less risky to lenders, qualifying you for lower interest rates, and helping you avoid fees like private mortgage insurance. A good understanding of down payments will help you calculate your home loan costs to determine your monthly mortgage payment.
2. Not reviewing your credit score
Your home loan interest rate is highly dependent on your credit score. Lenders evaluate your creditworthiness based on your credit score. If your score is high, chances of your loan being approved and at a lower interest rate are very high. Regularly reviewing your credit score before applying for a home loan will allow you to take corrective measures to improve your credit score so you can access low-interest financing.
3. Failure to compare home loan offers from different lenders
Depending on your credit profile, interest rate, loan amount, repayment tenure, processing charges, and LTV ratio offered by different lenders vary. Before submitting a loan application, compare loan offers from different lenders. Prioritize financial institutions with whom you have an existing financial relationship, then compare their interest rates and loan features with other lenders available in the financial marketplace—partner with the lender with favorable interest rates for an adequate loan amount and an optimal loan tenure.
4. Ignoring equated monthly installments (EMIs) affordability
When reviewing your application, lenders will consider your repayment capacity. Lenders prioritize borrowers with total EMI obligations. EMI allows you to know exactly how much money you should pay towards your monthly loan, making personal budgeting easier. Consider leveraging an online home loan EMI calculator to determine your optimum equated monthly installment based on your repayment capacity. This will lower your chances of defaulting in future EMIs. EMI can be calculated using a reducing balance or flat rate method.
5. Opting for short tenure loans
Besides a smaller loan amount, a short tenure loan increases EMI payment default risk because of the high EMI amount required, which depends on credit history, age, and repayment capacity. Opting for a longer tenure will reduce your EMI and help you meet your financial obligations.
Endnote
Buying a home is a vast investment requiring a lot of money. Getting a home loan relieves you of the burden of waiting for a long time to own a home. Being aware of the mistakes to avoid when acquiring these loans will help you make better financial decisions while protecting your sanity.
