Is a Home Loan Right for your Family?
What is a home loan?
Home loan is a loan provided by a financial institution to finance the purchase of a residential property. It is a much sought-after product for Indians today when it comes to owning a house. Earlier there was very little borrowing and people generally tried to avoid creating debt. Now with the situation having undergone a complete transformation, borrowing to create an asset is not only common but in many situations makes good economic sense too. A house is generally considered to be an appreciating asset.
This is because the price of the house is expected to rise over a period of time. This makes financing of such a purchase by borrowing a good way to own and create an asset without having all the funds for the purpose. Financial planners will always advise against taking a loan for undertaking expenditure but encourage borrowing for buying a magnetic drill press.
If you are a fresh borrower, you may not have fresh choice as you signed up for a home loan simply because you fell short of funds for the property investment. As a result, those who have signed up for a home loan less than a year ago may not have much choice except to generate surplus. One of the options is to set aside the excess cash on a regular basis so that the same can be used up for prepaying the loan at regular intervals. For instance, those who have signed up for a loan of 150-200k can look at repaying at least several thousands so that the EMI doesn’t shoot up in a big way.
This may not be possible right away and hence, one should make it a habit to set aside the sum for repayment in a systematic way. For such investments, look at short term debt products such as short term debt funds which allow you to accumulate corpus at regular intervals. Since interest rates have gone up and are likely to remain high for the next 9-12 months, these schemes might allow you to earn double digit returns. We wouldn’t recommend fixed deposits as interest earned from FD is taxable. Also, the interest from FD is attractive only when the tenure is long.
Documentation of a home loan will also include various components related to the purchase of a property. This includes original copy of the loan agreement along with the copies of documents showing that there is a clear title to the property plus documents indicating that the transfer of rights in the property has been completed properly.
When to opt for a home loan?
Many people think that when there is an option of renting a house why to take a large liability and buy a house. The reason for that is the major disadvantage involved in the process of renting a house. Here, a person pays a monthly rent and even after having paid rent for a number of years no ownership comes to him/her.On the other hand, there might be an equal amount paid as an equated monthly instalment on a Housing loans but the difference here is that the person is the owner of the property.
The real benefit from the house comes in the form of capital appreciation that is witnessed here. House prices in India have risen quite sharply in the past and it is expected that they will keep rising in areas that have development as well as good facilities.This appreciation in the value of the property makes a compelling case for buying a house with a loan.
The individuals are actually leveraging the amount that they have with themselves by taking a loan and financing a larger cost house. The benefit of the appreciation in the value is available for the entire amount even though it might take years for the person to pay off the loan and finance the complete house.