Frequently Asked Questions About Home Loans


, Finance

What are the additional costs that are involved in taking a home loan?

At the time of taking a home loan, you don’t just pay the EMI on the loan. There are various other charges, though not all apply to every case that you being the borrower have to bear. Generally talking, there is mostly a processing fee of about 0.5-1% which is inclusive in the loan amount. At times, with enough luck, the lenders waiver it off completely. For the property endorsing high values, two evaluations are done, and the lower of the two is considered for the home loan sanctioning. According to the lenders it is known as the technical evaluation fee. The majority of the lenders engage firms to scrutinize borrowers’ legal documents. Generally, this cost is not included in the processing fee. but some public sector also known as the PSU lenders charge it separately.

What is an EMI?

EMI is the amount that is due at your end to pay to the bank or any other lender at a certain period of time mostly in a monthly cycle. You just have to repay the home loan in EMIs, which includes both the principal amount and interest rate amount. The process of repayment by the method of EMI starts from the month following the month in which you take the full disbursement.

How can we calculate EMI’s?

The EMI’S can be calculated using the home loan EMI calculator which is a virtual tool. The home loan EMI calculator appoints a general formula for the calculation of not only the EMI but also the interest rate using the Principal amount and tenure of the home loan.

How does one make repayments to lenders?

Generally, the lenders offer various modes for loan repayment. You can also issue standing instructions to the banker to pay the installments through ECS (Electronic Clearing System), opt for direct deduction of monthly installments by your employer, or issue post-dated cheques from your salary account.

How does my loan outstanding change?

To know this you need to understand the meaning of principal amount. The principal amount is the basic amount that you have borrowed from the bank. So, EMI paid by you every month has a principal component, in addition to the interest that is paid. In an ideal situation, if you are paying the principal each month, then the loan outstanding will also reduce each month and one ends up paying the interest only on the reduced loan outstanding. The majority of the banks follow the monthly reducing basis approach.

Can you pre-close your loan ahead of schedule?

If you want or need to you can easily pre-close the loan ahead of its original tenure. It depends on the rate of interest of the home loan. If you have taken the loan on a floating interest rate, no charge will be applicable. If the interest rate is a fixed rate, there may a charge applicable.

What is a part prepayment of a home loan? Does it help to prepay?

Partial prepayment is the payment that is made by the borrower in addition to the regular EMI’s that the borrower pays. In this way, the outstanding principal amount is directly reduced and the interest gets calculated on the reduced principal. Not only this, but prepayment also helps in reducing the total interest outgo as the loan tenure gets reduced. The more the prepayment amount and the longer the period and clearly the more will be your savings.

What documents should the borrower receive from the bank each year against the EMIs I pay?

When it comes to the part of the action of the bank, every home loan lender is supposed to provide you with a statement at the beginning of the year in order to showcase the total interest and principal that is expected to be repaid during the year. This statement issued by the bank further helps the borrower to declare the figures to your accounts department as a declaration of investment proof for a tax deduction. As the year ends, the lender or the bank is supposed to send a statement again showing how much of total interest and principal is expected to be repaid during the year. Not only this, but the statement issued by the lender also helps you to declare the figures to your accounts department as a declaration of investment proof for a tax deduction. After this again at the end of the year, the bank or the lender needs to send a statement again showing the actual amount of interest and principal repaid that would help you to take tax benefits.

Should the borrower take insurance to cover home loan liability?

It is always a wise decision to cover your home loan liability and not let it fall on your family in your absence. The borrower has the option to either buy a pure term insurance plan or a mortgage insurance plan for an amount equal to the loan amount for a specific tenure. The money borrower is also allowed to pay a single premium or regular premiums to buy any such plans. However, this does not make it compulsory to buy such an insurance plan while taking a home loan from the lender.

I already have a home loan? Would I get a home improvement loan?

A home improvement loan can be availed in order to facilitate the improvement of a self-owned property to existing or new customers. This is a type of home loan which may be used for repairs, renovations, improvement, and extension of the house. The working of the loan is somewhat like this; The borrower will have to give a rough idea about the cost of the work that is intended to be done on the property. Once the lender receives it, the lender will then will take a quotation from the contractor to verify the estimate submitted. After proper verification, the money is released at the rate of the construction work to the contractor to whom it is due and a regular check is done.

In today’s time, there are some banks which also offer a ‘top-up loan’ that can be availed time and again for various personal requirement based on the property value. These lenders offer the borrowers additional funds against the security of the same property. In order to avail of a top-up loan, the minimum vintage required is of at least 6 months for the loan availed. The purpose of these top-up loans can be furnishing of the home, buying consumer durables, a child’s education, family holiday, or any other personal requirement.

What are the tax benefits on home loans?

Out of the total annual EMIs, the principal component further receives tax benefit under Section 80C of the Income Tax Act. Even if it is the case of partial prepayment amount, it still qualifies for the same, but it should be within the overall limit of Rs 1.5 lakh under Section 80C.

What should one consider while taking a home loan?

Always try to choose a lender who offers the lowest EMIs, which means that you pay substantially less in repayments as compared to others. If the lender is offering the longest tenure of, say, 30 years many not always be a good thing. You should opt for it only if you are sure to repay early without prepayment charges. You must see if the lender is including the cost of furnishing the house in the project cost.