Buying a house is one of the important decisions of one's life. And this is the right time to buy a house as interest rates are coming down and builders are offering hefty discounts to clear inventory. However, there are many pitfalls that can turn this smooth process into a bumpy one. Let’s look at the pitfalls that you should be aware of and avoid.
Look into your wallet
Buying a house that you can’t afford to pay for is like eating more food than you can digest and you end up with indigestion. So you must look closely at your lifestyle and financial capabilities. You need to plan for an unfortunate eventuality like the loss of job or illnesses and ensure that your wallet will be able to take the pinch for a few months at least.
Evaluate market conditions
Since it is your biggest investment in life, you need to study the real estate market to find out if the property prices are stable and are not likely to fall further. You also need to understand interest rate movement. If you think that interest rates may fall in the near future, you may wait for some more time.
Tab on debt levels
It would be a smart deal, if all your loan EMIs, including that of a home loan, are not more than 10 per cent to 15 per cent of your total income. It is ideal to keep your total debt liability within the 10 to 20 per cent range. You also need to repay all your high interest and long tenure debts soon.
Increase the down payment
Typically, you have to contribute around 10 to 15 per cent of the purchase value of a house as a down payment. However, if you have more funds, it is ideal to pay more than the required down payment as it will reduce debt need significantly.
Try to prepay
If you have excess funds, it would be better to pre-pay the loan partially. For example, you could prepay from your yearly bonuses or from your savings from the salary hikes that are expected to happen periodically. Prepaying can lower the tenure and help you save on interest.
No concept of family bank
Generally, people prefer to opt for a bank, which they have been dealing with for some time. However, you must do your home work on interest rates and incentives offered by different banks. People get the deals as per their credit profile. So it is always possible that a bank may give you a better deal than the one which your brother might have got.
You may lose processing fee If you have nothing in writing from the bank, it is possible that you might lose the processing fee, which you pay to the bank, in case the loan was not approved. So either you get something in writing from the bank or factor in the money for these kinds of losses.
Read the fine print
Most of us just close our eyes and sign on the dotted line. We forget to read the clauses that are in fine print in the loan agreement. You need to understand the significance and impact of these clauses before you sign the agreement. It is always better to take some time out to read through the loan agreement carefully, instead of ending up in a financial hell-hole. You must ensure that clauses such as Force Majeure and Reset clause on fixed rates are included in the agreement.
(The writer is the CEO of bankbazaar.com)