A home loan is one of the largest financial decisions you will make in your life. Homeownership is a dream for most, but taking a loan without foresight can cause financial pressure. Small errors can lead to increased interest rates, extra penalties, and even loan repayment problems. To guide you through this important decision, we have put together a list of errors to steer clear of based on insights from leading experts in trusted home loans in India, such as Credit Dharma.

• Skipping Home Loan Pre-Approval

Most homebuyers hurry into the home loan application without being pre-approved. Being pre-approved tells you exactly how much you can borrow and makes it easier for you to limit your choices of properties within your budget.

Pre-approval also enhances your negotiating power with sellers since they regard pre-approved buyers as more serious.

• Failure to Check Your Credit Score Prior to Application

Your credit score is very important in establishing your loan-worthiness and the interest rate you qualify for. A poor score may result in a higher interest rate or even your loan being rejected.

Before applying, obtain your credit report from a recognized credit bureau and take steps to improve your score if necessary.

• Choosing an Inappropriate Loan Tenure

Tenure has a big influence on your EMI and overall interest. Though tenures might make EMIs smaller every month, they swell your overall interest payment. Short tenures, on the other hand, swell your EMIs but reduce interest expenses. Choose your repayment ability wisely and strike the right balance between tenure and playability.

• Underestimating the Down Payment Requirement

The majority of lenders insist on a down payment between 10% and 25% of the property value. Borrowers usually make the wrong assumption that they can borrow the entire sum from a loan. A higher down payment decreases your loan burden as well as your overall interest charges. Saving beforehand can ensure better loan terms and lower EMIs.

• Not Comparing Interest Rates and Loan Offers

Various lenders charge different interest rates, processing fees, and repayment periods. Failure to compare various lenders may result in an escalation of expenses. Utilize online loan comparison sites and study banks, NBFCs, and financial institutions such as Credit Dharma to choose the most favorable deal.

• Overlooking Extra Charges Related to Home Loans

Home loans also involve some extra expenses like processing fees, legal fees, stamp duty, registration fees, insurance, and maintenance. People tend to only consider the amount of the loan and forget these charges, causing them financial difficulties. Consider these expenses while making a budget so that there will be no last-minute shock.

• Opting For the Wrong Kind of Interest Rate

Borrowers can choose between fixed and floating interest rates. Fixed rates remain constant throughout the loan tenure,offering stability, whereas floating rates fluctuate based on market conditions, potentially lowering your EMI over time.

Assess your risk appetite and financial stability before making a decision.

• Overestimating Your Repayment Capacity

Borrowers tend to believe they can manage higher EMIs on the basis of future salary hikes or business expansion.However, unexpected financial difficulties, such as the loss of a job or illness, can put repayment under stress. It is better to maintain EMI in the range of 30-40% of your net monthly income to allow easy repayment.

• Not Reading the Loan Agreement Carefully

Most borrowers sign the loan agreement without carefully going through the terms and conditions. Prepayment charges, foreclosure charges, interest reset conditions, and late payment charges have hidden clauses that can result in unintended costs. Read all documents carefully and clear your doubts before signing.

• Overlooking the Effect of Interest Rate Increases on Floating Loans

If you opt for a floating-rate home loan, prepare yourself for potential interest rate hikes. Most people think rates will remain constant, but market forces can hike EMIs significantly. Prepare yourself for the same by maintaining a contingency fund.

• Not Accounting for Future Financial Goals

Taking on more debt while paying for your home loan can result in immense financial pressure.

Make sure that your home loan is in sync with your overall financial plan to ensure stability.

• Overlooking Home Loan Tax Benefits

Home loans are eligible for tax benefits under Section 80C and Section 24(b) of the Income Tax Act. Borrowers who do not claim these benefits lose out on possible savings. Do not be one among them!

• Having Additional Debt While Paying Your Home Loan

Availing personal loans, auto loans, or credit cards on top of paying a home loan can negatively impact your debt-to-income ratio, and you might struggle to service EMIs. Avoid unnecessary borrowing until you have repaid a significant portion of your home loan.

• Not Keeping Track of EMI Payments

Late payment of EMI can attract penalties, increased interest, and a poor credit rating. Set up auto-payments or reminders to avoid delays and ensure a good payment history.

• Failing to Create a Contingency Fund

Unplanned financial crises, such as losing employment or health emergencies, can affect your ability to repay the loan. Maintaining an emergency fund of 6-12 months' EMI payment ensures you can tackle unforeseen circumstances without defaulting.

• Choosing Loans with Negative Amortization

Certain loans initially have smaller EMIs wherein the EMI is less than the total interest due for the month, leading to the increasing principal amount with time. This results in higher repayments over time. Shun such a structure of the loan to avoid debt buildup.

• Neglecting the Significance of Loan Insurance

Most borrowers do not consider loan insurance, which safeguards against unexpected events like death, disability, or loss of employment. A home loan protection plan guarantees that your family will not be left with loan repayment in the event of an emergency.

• Not Considering the Option of Loan Balance Transfer

If you discover a lender charging less interest after you have taken a loan, opt for a balance transfer of the loan to minimize your EMI burden.

Before switching, however, be sure to check for transfer charges and hidden fees.

Conclusion

Availing a home loan is a significant financial decision that must be planned and made with conviction. For a stress-free homeownership journey, do not commit these common errors.

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