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Buying a home is one of the most important decisions one makes in his/her lifetime. It requires prior preparation and understanding of home finance and funding before taking the plunge. Buying a home also means that one will have a huge debt for an extended period of time, and it is important to understand its implications on the future and current financial status of an individual. Learn the basics of funding and financing before you take the big step. Here are a few things to consider before you are trapped in the debt crunch.
- A portion of your income will be blocked for an extended period of time as an EMI (Equated Monthly Installment).
- Buying a home requires a down payment. This might amount to almost 20% of the cost of your property.
- Most banks under the RBI (Reserve Bank of India) sanction loans upto 80% of the total cost of the property. This implies that an individual needs to have a decent amount of saving before considering investment in real estate.
- A housing loan is a long term commitment. Make sure you understand the implications of this long term financial obligation.
- Do you have other priorities too like your child’s education or your retirement? Then make sure buying a home and servicing that debt doesn’t interfere with any of your other financial decisions.
- Do you have any assets that you can liquidate? Then, these existing liquid assets can amount to a crucial portion of you down payment. Fixed deposits, stocks, EPF (Employee Provident Fund), mutual funds, insurance policies etc. can be a few options of sources of funds for your down payment. It is advisable not to draw all the funds into buying a home and keeping some for emergencies that might arise.
- You can also explore other loan options like the loan against life insurance. Here the interest rates are much lower with an easy repayment schedule. Personal loan or loan on a credit card should not be preferred as they tend to charge high interest rates.
- After understanding the all these aspects, you must check the loan amount you need and calculate the EMI for that amount. Check your EMI and see if you will be able to pay this on a monthly basis.
- Final step is a detailed monthly expense budget to understand your capability to service the housing loan. Calculate your net monthly expenses including rent, domestic expenses, accidental expenses, policy payments etc. See if these expenses plus the EMI is a feasible amount for you.
- If you are looking at a ready to move in home, then make sure you include housing society charges as another fixed monthly expense.
After understanding the pros and cons of availing a home loan, you can make an informed choice so that you don’t get caught up in debt. If you think you want to give it a test run before you actually avail a loan, then try saving an amount equal to the EMI every month for 1 year and see how you handle the financial obligation.