Home loan
Buying a home is on everybody's agenda.With burgeoning population, land is becoming scarce.There is, of course, the arid land, which is abundantly available even today.But few would desire to build their home in blistering heat, with water scarcity.So people flock towards land that has some greenery, some employment opportunities, some infrastructure, and some leisure activity.Here the demand and supply curve of economics comes into play.The demand for such lands far exceeds the supply.Therefore, the vendor of the land is able to command a higher price.This does not mean that only those who roam with hard cash in their pockets can afford to buy land or house.There are many bankers and lenders offering loans for purchase of houses, making them affordable despite the rising prices.
Home loans are generally long-term loans.They are cheaper when compared to many other types of loans that the bank or lender offers.This is because the lender is assured of systematic return for a long period.If the bank lent the same funds on short-term, it would be forced to locate a new borrower at the end of the term.Any gap between two loans would not fetch any return for the bank.New borrower also implies in-depth verification of documents offered as security, and repayment capacity of the borrower.Apart from this, the banker anticipates that the interest charged will, by law of averages, be profitable to the bank.
Home loans are secured loans, i.e., the homes are offered as a security to the banker or the lender.Relevant mortgage papers are executed in favor of the banker or the lender, securing their principal plus interest and other recovery charges.If the borrower defaults on the loan, the lender or the banker as the case may be, is at liberty to sell the underlying home and recover the dues.This is another reason for banker to go easy on interest.
Home loans are amortized over the long-term.Generally such amortization is done in monthly installments.The banker or lender calculates equated monthly installments comprised of both interest and principal components.The interest and principal component within this equated monthly installment keep on varying, i .e., interest component keeps on decreasing with time, and principal component keeps on increasing with time.Effectively, the amount of loan repaid per installment increases every month.
Interest on home loans can be calculated either on fixed interest rates or on floating rates.The difference between the two types is that floating interest rates move up or down based on the index to which they may be linked.Because of floating interest rates, the quantum of interest payable by the borrower increases or decreases.The equated monthly installment, however, is kept stagnant, and the borrower may save on a couple of installments towards the end of the loan.There is the risk, of course, of the interest rates climbing up.In such cases, the borrower may pay more installments than he initially bargained for.
Bankers and other lenders have come up with various types of customized loans.Of these, balloon mortgages are worth mentioning.The borrower may not have adequate income to entitle him or her to a certain amount of loan.However, there may be some anticipated receipt within the loan tenure from some reliable source such as maturity of a government bond or other securities.The lender recovers the excess amount lent on maturity of such bond or securities.
Bankers also allow some home loan purchasers to pay only interest in the initial few years, and start the amortization after such a moratorium.As income increases annually, the borrower finds it easier to pay the full-equated monthly installment at a later date.Waiting for the income to rise to that level may mean increase in cost of the home as well.Therefore, buying a home immediately with loan makes more sense than to wait for income to be adequate for obtaining required loan.
Lenders (including bankers) inspect the documents and rights conferred on borrowers by such documents.In addition, they also verify the loan repayment record of the borrowers.Income details of borrowers are also essential for obtaining home loans.If the income is inadequate, the borrower's spouse can also join for the loan, and thereby become a co-applicant.
Major advantages of taking home loans are:
- The borrower can acquire a home and save on rents.Rents increase annually, and are difficult to plan for, especially when planning for retirement.
- Cost of homes increases almost every year.By borrowing and acquiring a home at present cost, borrower can avoid paying the higher value for the house.Such increase in cost of the house is almost always higher than the interest that the borrower pays to the banker or lender.
- Home loans are repayable in equated monthly installments, which are affordable.Without such home loan products, it would be impossible for borrower to buy a home of his or her choice.
- The interest paid on home loans is deductible from income tax.
- Home loans are amortized.Therefore, if the installments paid by the borrower in the loan period are discounted at inflation rates, the amount paid for purchasing the home will turn out of be much lower than its present value.
Home loans can be used for consolidating some debts.Additional home loan can be availed based on increased income of the borrower and the increase in value of the home property.
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