Do you know all about a home loan, and its different features and components? Even if you do, read to know more.

When we talk about a home loan, it refers to home loan eligibility, loan application process, costs, tax benefits, pre-payment option and of course an insurance cover for it.

Let us discuss all these factors one by one for a better understanding of the concept.

Who is Eligible for a Home Loan?

The first question is whether you are eligible to apply for a home loan. You must satisfy the following conditions to be an eligible applicant –

  1. Right age
  2. Earning stability
  3. Financial stability
  4. Good Credit Score

What is Home Loan Eligibility?

Home loan eligibility is the first step when you apply for a home loan. Home loan eligibility is the amount of loan you are eligible to apply for. Home loan schemes vary according to your eligibility.

Loan eligibility is the maximum amount that your money lender is ready to grant you. But it is not necessary that you borrow that particular amount.

You can borrow a lesser sum. You can calculate your loan eligibility with the help of home loan eligibility calculator available online on the websites of money lenders.

What are the factors that influence Home Loan Eligibility?

It is important to know the factors that affect your eligibility for a loan for increasing your eligibility. Following are the factors that influence your home loan eligibility –

  1. Your income
  2. Credit history
  3. Attributes of the property
  4. Professional background
  5. Number of dependants
  6. Co-applicants, if any
  7. Age of the applicant
  8. Existing EMIs, if any.

What is the Process of Loan Application and Disbursement?

  1. 1. Loan Application –The lending institution decides whether you are eligible for the loan or not on the basis of the documentary proofs and application submitted by you.
  2. Sanction Letter – When your loan application gets approved, the bank/financial institution gives you the sanction letter stating the amount of loan sanctioned, the tenor of the loan, the rate of interest and EMI payable.
  3. Disbursement of the loan amount – The loan is disbursed either in full or in installments based on the stage of construction of the property.

What are the Costs of a Home Loan?

It is important to identify the costs involved in a loan. Basically, Equated Monthly Instalments (EMI) and processing fee are the costs involved in any home loan.

EMI is a combination of the principal loan amount and interest payable. Interest payable is the major and actual cost of any loan as money lenders often waive processing fee under many home loan schemes.

What are the factors that influence Interest Rates of Home Loan?

Home loan rates can be either fixed or flexible. There are different methods of calculating the interest rates charged by the money lenders. Following are the factors that influence the interest rate charged by the banks-

  1. Benchmark Prime Lending Rate (BPLR)
  2. Marginal Cost of Funds based Lending Rate (MCLR) or Base Rate
  3. Repo Rate
  4. Reverse Repo Rate
  5. Statutory Liquidity Ratio
  6. Cash Reserve Ratio

Since interest is the main cost of any loan, you should always try to get a loan at a lower interest rate. If you are aware of the factors that influence your home loan interest rate, you have a better chance of availing a home loan at a lower interest rate.

What are the Tax Benefits of a Home Loan?

The principal loan amount is eligible for tax benefits under section 80C of the Income Tax Act. In case you make any pre-payments, the amount of pre-payment also qualifies for deduction under Section 80C up to a limit of Rs.1.5 lakh.

What is Prepayment of Home Loan?

As the name suggests, prepayment means payment before time. If you pay an additional sum to your lender along with your regular EMI, it is called prepayment of the loan. If you make a prepayment of the loan, your outstanding loan amount gets reduced and your interest gets calculated on the balance loan amount. Hence prepayment helps in reducing your total cash outflow by reducing your interest payment.

Should you buy an insurance cover for your home loan liability?

It is always beneficial to buy a term insurance plan or mortgage insurance plan equal to the amount of your EMI to cover your home loan liability.

This would help you plan your financial budget and protect your family from any kind of burden in your absence.

The Bottom Line

Now that you know the basic facts about a home loan, you can avoid a lot of hassles and make a better decision about your home loan plan.

A home loan plan with greater loan eligibility, lower EMIs, and unpenalized pre-payments is always a better choice.

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