subject: Some factors you need to take into account while borrowing a home loan [print this page] Some factors you need to take into account while borrowing a home loan
Repayment of a loan taken to buy a house is through EMIs (equated monthly instalments). EMIs are the fixed instalments a borrower needs to pay over the tenure of the loan, to repay the debt as well as the related interest to the bank. Usually, the EMIs remain constant over the tenure of the loan.
Arriving at EMI
To put it in simple terms, the loan amount plus the interest on the loan through the tenure, divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on amount of loan, tenure, rate of interest, and mode of calculation of interest.
Tenure significant
One of the important parameters governing the amount of EMI is the tenure of the loan. Nowadays, you can avail a loan for various tenures - from five years up to 20 years - and in a few cases, up to 25 years as well.
If you decide to borrow early, at a younger age, you can opt for a longer tenure loan -15 to 20 years. This way, the monthly EMI payments will be lower. Although the amount of interest paid will be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing at the end of your earning years, say around the 50s, you will have to opt for a shorter tenure.
The longer the tenure higher the interest rate because of the increased risk of the bank. However, the EMI is lower because the loan and interest are spread over a longer period of time. The shorter the tenure, lower is the interest rate because of the reduced risk of the bank. However, in this case, the EMI is higher because the loan and interest are to be repaid over a shorter period of time.
The income of the borrower also matters. This includes both the present as well as the future income of the borrower. The borrower should be able to repay his EMIs without compromising significantly on his quality of life. The cash flows available after repayment of EMIs should not entail a dent in his living standards. As such, a judicious planning of cash flows is required.
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Courtesy Times Property dtd:-23/10/2010
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