Friday, October 20

Applying for a Home Loan – Know the Pros and Cons

Each one of us has the lifetime ambition to own a dream home.

Depending on your income and choice of location, you can zero down on a house property. The next aspect is financing- real estate prices are quite steep and it is a tad difficult for a salaried person to buy a house without a Home Loan. With a choice of banks and NBFCs offering Home Loans, the primary choice of lender is determined by the Home Loan interest rate offered.

Buying a Home by Availing a Home Loan

Pros

  • Tax benefit: One main reason , home buyers take a Housing Loan is to enjoy the tax benefits it offers. Both the interest payment on the Home Loan as well as the principal repayment is allowed as a deduction.
  • Capital appreciation: There has been a marked increase in real estate. To cash in on the boom, taking a Housing Loan and buying a house can help you reap gains in the form of capital appreciation.
  • Leverage cost of capital: When the interest cycle is down, you can benefit from the low Home Loan interest rates. This translates to lower cost of acquisition. You can instead employ your savings on higher yield securities and leverage the costs vs benefits.

Cons

All good things do have certain flaws; a Home Loan too has some

  • A long term liability: A loan is any day a liability that you have to settle. Home Loans generally are for a long tenure, say 10 to 25 years. You will be saddled with this liability and an outflow every month towards EMI.
  • Higher cost of acquisition: The interest that you pay on the Home Loan is quite a significant amount. This adds up to the cost of the property.
  • Interest rate fluctuations: Home Loan interest rates fluctuate based on market conditions. A floating rate Home Loan can prove beneficial during a low interest regime; but the subsequent rise in the interest rate can prove to be a spoilsport on your well planned financial goals.

When you decide to apply for Home Loan, you need to meet the eligibility criteria, which has a bearing on the amount of loan that will be approved. Upon submission of the required documents for Home Loan, and verification of the title deeds, your Home Loan application will be processed. In most cases, you can avail a House Loan to the extent of 85% of the value of the house property.

Buying a Home without a Home Loan

Pros

Though Home Loans are the popular option to financing a home purchase, there are quite a good number of people who dislike the very idea of being in debt.

Home buyers can bargain for quantum discounts, if they are making the payment in cash. Further, if your choice the project is not approved by any financial institution, you can ahead with your dream home purchase with your own savings.

Lending institutions set some eligibility criteria for Home Loan processing. You can do away with all the administrative hassles and paperwork by not taking a Home Loan.

Cons

Buying a home out of your own resources can lead to a liquidity crunch, especially if the property cost is very high.

Income tax authorities can come knocking at your door to question your source of funds. Of course, if you have filed your returns, you can always prove the source of your funding.

Housing Loans are very popular in India; more than 80% of the house purchases are financed through Housing Loans.

When there are financiers ready to offer you loans, take it and buy your dream home, However, do your homework on the best interest rates on offer as well as examine in detail the terms and conditions.

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