Applying for a home loan? Remember that taking a home loan is arguably one of the biggest financial decision in a lifetime. Owning your home will not be that easy since you will have to take responsibility for repaying your monthly EMI in a timely manner without any defaults and also plan your budget spread out over several years in order to meet other commitments alongside repaying your home loan. You should always plan things out with care prior to applying for a home loan. You should also remember that a home is a lifetime asset which appreciates in value eventually and hence ownership is always better than renting in the long term.
While applying for a home loan, while you do have to keep several aspects in mind, the home loan interest rate is certainly something to keep in mind. This is because the home loan interest will influence the EMI amount that you repay every month along with the total outgo at your end. Here are a few tips that will help you get a better interest rate while you are applying for your home loan.
- Always keep your credit score in great shape- The credit score is of paramount importance and will be scrutinized carefully by the lender prior to approving the loan. The credit score should be high in order to help you angle for a lower rate of interest and higher eligibility. The higher your credit score goes, the lower will be your rate of interest. Remember that the opposite also happens. You should make sure that your credit score is at least 750 and even more if possible. This will help you get a better interest rate on your home loan.
- Make as much down payment as possible- You should ideally be prepared to pay 20% of the home price as the down payment in order to land the best possible interest rate on the home loan. 10% down payment is naturally perceived as riskier if compared to a down payment of 20%.
- Always keep your debt proportion lower as compared to your income- The financial institution will certainly be assessing your overall debt to income ratio. This is a major aspect when it comes to getting your application sanctioned and getting lower rates of interest. This ratio is the debt amount, i.e. existing loans and credit card debt that you have in comparison to your total income. The lower your debt levels in proportion to your income, the higher your eligibility and chances of getting a lower interest rate. Make sure you pay off outstanding credit card dues and loans as much as possible before applying for your home loan.
- Employment history will also be scrutinized by the lender- If you have a stable history of employment, preferably at a well-known or reputed company, the lender will naturally be more inclined towards offering you a lower rate of interest. Those who have consistent earnings every month or stable salaries will naturally be able to get a better interest rate.
- Negotiation can also help you get a lower rate of interest- You should never instantly agree to the rate of interest that you are being offered. You may negotiate for a lower rate. Even if you manage to get a slight reduction, this will have a major impact on your monthly EMI which will come down drastically. You may also negotiate on the terms and conditions like pre-payment or foreclosure charges and so on in case you cannot negotiate on the interest rate. The higher your credit score, the better your chances for negotiating a lower rate of interest.
- Compare loan offers and interest rates- Make sure that you compare interest rates offered on home loans by multiple banks and NBFCs before coming to a final decision.
- Existing customers may benefit- If you are already an existing customer at a bank or financial institution, you can speak to the manager/person concerned about getting a home loan at a lower rate of interest. Existing customers who have good relationships with their banking institutions always stand a chance when it comes to getting slightly lower rates of interest on home loans.
Lowering interest rates on your existing home loan
If you already have a home loan to repay and are finding the rate of interest too high, there are a few steps that you can follow to lower the same.
- Home loan balance transfer can be an option- You can choose to transfer your home loan to another lender. The balance transfer process is not that difficult and you may transfer in lieu of a lower rate of interest and other flexible terms and conditions that you may have been seeking. However, you should carefully work out the interest that you save overall before taking this decision. Make sure that you factor in all other costs including balance transfer fees/charges. Transferring your home loan in the early years may help you save on interest while it will not be as effective in the final few years when the principal component is being majorly repaid via the monthly EMI.
- Home loan pre-payment can be done in stages- You can adopt a phase-wise approach towards pre-paying your home loan. You can make pre-payments at intervals which will lower the principal component and hence overall interest outgo on the loan. This will help you reduce your monthly EMIs to some extent.
- Scaling up your EMI amounts may also be a good move- You can slightly increase your EMI amounts every month. This will help bring down the overall interest outgo to a large extent. With every increment and increase in income, scale up your EMI by 5-10% annually and you will eventually clear out the loan faster while repaying lesser interest at the same time.