The obsession to own a home has always been in our tradition and even today, home ownership is viewed as an achievement in one's personal life. For the very reason, people save their hard-earned money and streamline all their monthly expenses to make up for the down payment towards a new home. The big question, however, remains that after all the hardships, can the buyer afford to finance his new house completely on his own?
As the housing price continues to soar, for many middle income individuals, buying a home from their savings alone is becoming increasingly difficult. A home loan comes as a savior at that juncture. It fulfills a buyer’s desire to own a house even when he can't pay for it entirely from his savings. A home loan gives the borrower the freedom to payback the amount in Equated Monthly Installments (EMI) spread over several years. This is a prudent arrangement as compared to holding back your expenses for every small thing you desire in life.
Taking The Bull By The Horns
While applying for a home loan, all of us worry about the EMI outgo. But that worry stems mostly from our lack of understanding of how EMI actually works and partly due to our ignorance about the steps we can take to rein it in. In fact, there are many ways to lower EMI and associated loan tenure, which we will discuss here.
Clearly, the most important factor that makes an EMI easy or difficult to bear is the borrower’s monthly income. However, other factors such as asset liability, stability of income, and other debt obligations etc also play a significant part. Listed below are some of the measures to consider to ease the EMI burden.
● EMI for longer tenure- This may be yet another feasible option for many: Pay smaller installments for a longer duration. A home loan with a longer tenure increases the overall interest outgo, but if your monthly income can't sustain a larger EMI, that's the most reasonable option you have.
● Switching to another Lender- Though most often borrowers don’t prefer to switch their lender once the loan repayments are underway, choice is completely on the borrowers to look out for other lenders for a favorable loan term. Anytime during the loan tenure if you come across any lender offering favorable terms, it is advisable to opt for home loan balance transfer. However, before switching to a new lender, make sure to check the penalty that you may have to suffer with the existing lender.
● Prepayments- Prepayment can be one of the best ways to drastically reduce your outstanding loan amount and thus the interest outgo on EMIs. Most banks allow pre-payments on home loans after a certain period. Therefore, you can plan to route your yearly bonus or any bulk amount that you receive during the loan tenure to make pre-payments and reduce your loan burden. This is the quickest way to reduce the home loan tenure and be able come out of the EMI payments sooner.
● Large Down Payments- By making a higher down payment initially, a customer can substantially reduce his loan amount and therefore the EMI outgo. As the interest is calculated based on the total outstanding loan amount, a lower loan amount means a lower interest outgo. This factor gets reflected in a smaller EMI. So, if you have a good, sustainable income, try to build a reasonable saving, which can be paid towards the down payment. Remember, a large down payment is the fastest way out of your EMIs.
● Negotiate interest rate with the Bank--A disciplined customer, who pays all his credit card bills on time and thus has a good credit score, is in a bargaining position while applying for a home loan. Negotiate with your banker to work out a favorable rate of interest on your home loan. A lower interest rates results in a lower EMI outgo. But for chronic defaulters who don't maintain good credit score, such negotiations may not be feasible.
EMI is a long term commitment and one needs to be articulate about carrying it of for years. Choose the option that best suits your monthly income and expense, keeping an eye on your long term financial goals.
Share Your EMI
While approving the home loan, Banks assure that the borrower is financially stable and is in a sound position to pay his EMIs. But, in cases where the borrower already has other EMI liabilities, it is advisable to opt for a joint home loan to increase the loan eligibility. In this case, though the EMI outgo remains, the borrowers can decide among themselves to share a percentage of EMI to reduce their individual burden.
Borrowers can also decide to divide the loan tenure among themselves, wherein one borrower pays the EMIs up to a certain period in the loan tenure and the second borrower pays for the remaining period. Join loan is yet another way to share the financial burden of EMIs.
Trust EMI Calculators
EMI calculators are helpful and easy to use. For the benefit of customers, almost all banks offer a home loan EMI calculator on their websites. It uses principal amount, prevailing interest rate and loan tenure to arrive at the EMI. The EMI amount is an indicator for the home loan borrower to plan his monthly expenses and keep a close check on the amount that he needs to pay towards his home loan over a period of time. Many financial websites offer advanced tools to calculate your EMI and generate monthly reports.
So, if you are also planning to purchase a home, don't delay further. Plan your finances well so that you are able to pay your EMIs without much of a burden on your income.