Buying a house is beyond doubt a landmark achievement in anyone’s life. On the one hand, ownership of a house while denotes financial acumen establishes one’s identity. On the other hand, this ownership comes with a large ticket obligation since, in most cases, the funding is made through a home loan. If you are one of those who have taken a home loan or are planning to take one, have you been able to arrive at the actual cost? In most of the cases, the borrowers are not. So, read on to know how the housing loan rates and the other factors impact your loan cost. This will help you plan better and bring down the value of your property acquisition.
Need to calculate the home loan cost
One may question the need to calculate the cost of the home loan itself. There may be counter-arguments, but the fact is that this loan runs for years and can have a severe impact on the availability of funds for other regular requirements. Also, this can impair the savings and creating a pool for various known and unknown needs. Consequently, it becomes imperative to understand the cost.
You may be amazed by this recommendation. Do not be since the average term for a home loan in India stands at ten years. It means that while the loan is taken for a more extended period, like 20 or more years, the borrower lands up paying altogether in 10 years only. Factors like improved income, promotions, bonuses, or any other windfall gain make the home loan paid off. A faster repayment makes the loan costlier. Let us see how in the following segment of the post.
Have You Checked the EMI Bifurcation?
Have you had a look at the amortization schedule received from the bank? In case you are an existing borrower, you must do it right now. And if you are a prospective borrower, then you must evaluate it. Multiple sites can be visited to work out the amort schedule. If you observe, most of the initial years’ instalment goes towards servicing your home loan rate, which means that a major part of the payment will get adjusted towards the interest. This results in the actual loan amount running off very slowly in the initial years.
Taking a cue from the above discussion on loan getting paid in 10 years, about 70% of the EMI would have gotten adjusted towards the interest if you check the amortization schedule. Less than 30% would have been paid off from the principal amount.
How Does It Impact the Borrower?
This would lead to making the actual home loan rate much higher than the one documented. If you were to calculate, you may not want to take a home loan or not pay up earlier. The idea here is not to scare you but to make you realize that you would need to have an idea about the actual cost so that you can plan your finances accordingly. Many times the home buyer will take a longer-term to have a low monthly instalment. You may also want to follow this strategy to have some surplus funds but as a word of caution, try paying as much as you can over and above the regular EMI since all that money is going to get adjusted in the principal outstanding and would eventually lead to lowering the overall cost of the loan.
Then there are individual other costs that generally one tends to overlook. The cost of registration, taxes, insurance, among others, is the outflows that hike your loan’s overall value. Under no circumstance should you be neglecting these when you are trying to arrive at the actual cost of your borrowing towards buying your dream house?
The ease of home loans has helped innumerable families and individuals alike to acquire a property. However, one needs to be financially savvy and should be aware of the actual cost of the loan being taken. This will only help in better planning of funds and taking decisions that would be financially prudent.