Understanding Home Loan Interest Rates and How to Get the Best Deal

Home loans are an excellent way to fund property purchase, especially now when real estate prices are charting new heights every day. Home loans allow homebuyers to buy their dream home now and pay for it in an affordable and stress-free manner over the years. Home loans, also often referred to as housing loans, are repaid in the form of EMIs or equated monthly instalments, which constitute a principal component and an interest component. The interest component is the lender's pay-out for taking risk and lending you money.

The interest component depends on the home loan interest rates offered. The higher the home loan interest rate, the higher the interest component. A low home loan interest rate enhances home loan affordability by reducing the interest component or the money that a home loan borrower must pay a lender in return for lending them money. Home buyers planning to avail of a home loan are therefore advised to try their best to avail of a home loan on the lowest interest rates possible.

Let us look at what home buyers can do to help themselves avail of a low home loan interest rate deal.

Do Your Research

These days, most homebuyers opt for a home loan to fund their home purchase. The popularity of home loans has grown tremendously over the last few years and so has the number of housing finance companies. There are many lenders in the market and not everyone will offer you the best home loan deal. Therefore, it is crucial that you do your research. This means talking to as many lenders as possible and getting an idea of what home loan interest rates each lender is willing to offer you. It is also equally important to not accept the first loan offer that comes your way. Instead, you must apply to different lenders and negotiate with each one of them and try and get the lowest interest rate possible on your housing loan. Once you have all the offers in hand, go online and use a home loan calculator to figure out the most lucrative deal for you and go with that one. However, do remember to never avail of a loan from a lender with a dubious reputation even if it means paying a slight higher interest rate to a lender who is reputed, reliable and experienced.

Make Sure You Have an Excellent Credit Score

The credit score is a three-digit number between 300 and 900 that indicates a borrower's creditworthiness and repayment capacity. Borrowers who have a credit score exceeding 750 are highly reliable borrowers who are quite unlikely to default on loan repayment. Thus, lenders extend their best home loan deals and the lowest home loan interest rates to borrowers who have a credit score higher than 750. Before applying for a home loan, check your credit score. Go ahead with the loan application only if your credit score is 750 or higher. If your credit score is below 750, do the following to increase your credit score and then apply for a loan.

• Pay your EMIs and credit card bills on time. Never miss due dates. This will reflect positively on your credit score.
• Never exhaust the limit on your credit cards. Try and keep your credit utilization ratio under 30%. Having a high credit utilization ratio lowers one's credit score and reduces one's chances of loan approval by portraying the borrower as credit hungry or excessively dependent on credit.
• Do not apply for new loans, at least until your credit score reaches 750.
• Practise rigorous financial discipline and be patient. Credit scores do not improve overnight. It will take a few months for your credit score to improve. So, your plans for buying a home may have to wait a bit.

Pay a Higher Down Payment

Based on the value of the property and the value of the loan, lenders are authorised to sanction up to 90% of a property's value as a loan. The remaining amount must be paid by the home loan borrower in the form of down payment. Lenders ask for down payment to ensure that the borrower has a stake in the property and thus, minimize any chances of loan default. When a home loan borrower pays a higher down payment, their equity in their home increases. This reduces the risk involved for the lender. Thus, lenders extend their best home loan deals to borrowers who pay a higher down payment. Further, a higher down payment also reduces the loan amount and therefore, the loan EMIs also come down, which makes home loan repayment further stress-free.

Opt for a Home Loan Balance Transfer

A home loan balance transfer is a facility that most lenders offer these days. Using this facility, home loan borrowers can transfer their existing loan to another lender offering better loan terms and conditions. When borrowers opt for a home loan balance transfer, they can easily negotiate with their new lender for lower home loan interest rates. Further, when one opts for this facility, the new lender pays off the old lender and the borrower's EMI obligation is then towards their new lender. However, there are a few things that borrowers must keep in mind when opting for this facility.

To start with, a home loan balance transfer proves beneficial only when opted for during the initial years of loan repayment when the interest component of the loan is still very high. During the initial years, going for a home loan balance transfer in return for low home loan interest rates can help one make one's EMIs manageable and also reduce the total cost of borrowing the loan. Further, home loan balance transfer includes a fee, which is often charged as a percentage of the total loan amount. When opted for during the initial years of a loan, the money saved by way of a lower home loan interest rate availed of through a home loan balance transfer is enough to cover the transfer fee. This is not the case if one avails of this facility during the later years of a loan. Thus, one must time their balance transfer property to ensure maximum gains and savings.

Final Words

It is crucial that home loan borrowers try their best to avail of home loans at the lowest home interest rate possible. This is important to ensure affordable home loan EMIs and stress-free loan repayment. We hope the tips shared in this article will help you score a low home loan interest rate deal.