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Buying a Home - The Financial Aspects
You are all set to buy your dream home. You've already considered the pros and cons of renting and done all your research and found the dream home. However, it's time to plan before you take the final plunge. There are a number of points that you have to consider like how much you can afford, what price to pay and whom to approach for a home loan. Read on and find the answers to all your questions.
How much can you afford on housing?
Before venturing out to buy a home, workout how much you can afford to spend on housing. This can be done in two ways.
- How much can you spend on the initial costs of purchase of the house?
- How much can you afford every month for the long-term expenses like mortgage payments, repairs and maintenance, insurance costs and property tax.
A few guidelines
- While buying a home bear in mind the fact that you should not borrow more than 35% of your monthly take home pay.
- The price of the house should not exceed three times your gross annual income.
- Your monthly mortgage payments, insurance and property tax should not exceed 25% of your family's monthly gross income.
What price to pay?
Once you've decided on the house you'd like to buy, you will have to decide as to how much you are willing to pay for it. Make sure that you are not paying more for the property than its market value.
Check out the going rates in the neighborhood or hire the help of a professional.
Taking a home loan.
These days housing loans have become very popular and affordable. With the tax sops offered to potential buyers and the cut in the interest rates it has become easier for people to purchase their dream home. The interest rates at present range from 8% to 10% depending on the loan period.*
There are various kinds of home loans.
- Purchase of home: On deciding the house you want to purchase, you can approach the banks or housing finance companies. If all the documentation is perfect then the loan is sanctioned. Mostly 75% to 85% of the amount is given as loan.
- Loans for constructing homes: Loans are given for constructing homes and also for the purchase of lands.
- Loans are also given for home improvement.
Factors to be considered before going in for a loan.
- Your repayment ability: Banks check whether you have a steady flow of income. You can get a loan on the combined base of you and your spouse's income. They would consider your age, salary and job. Generally they consider 35% to 40% of take home pay as your Equated Monthly Instalments. (EMI).
- Banks and financial institutions check creditworthiness based on debts you may have with other institutions.
- Housing loans can be got for a period ranging from 5 to 20 years.
- The interest rates today range from 8% to 10%* with floating interest rate schemes. The interest rates get adjusted to the current rates whenever there is a change in rates.
- There are hidden costs like processing fees, consultation fees, pre-payment penalties etc. So shop around for the best deal.
Before you finalise your loan check out on details like action in case of default and details of penal interest in the event of default.
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Geetha Dasarathy
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