Taking a home loan is a great way to finance the purchase of a new property for yourself. There are various types of home loans that you can get from multiple lenders. There are several key things that you need to keep in mind when taking a home loan including the rate of interest.
A high rate will increase the interest you will have to pay on the principal amount borrowed. In order to reduce costly interest rates, here’s what you can do:
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Choose Loans for a Shorter Tenure
The tenure of your home loan is one of the primary factors that determine the interest that you will have to pay on it. Longer tenures like 25 to 30 years tend to have an overall higher interest amount. However, they will allow you to have lower monthly installments.
If you opt for a loan with a shorter tenure of about 10-15 minutes, the monthly installments will be higher but the overall interest that you might have paid at the end of the tenure will be much less. Most people generally tend to choose longer tenures because it reduces the burden of high EMIs.
If you choose lower EMIs, you will have to pay more, in the long run, owing to the interest. It is a good idea to carefully go through your finances and figure out the amount you can afford each month. Choose a shorter tenure that allows you to pay that amount and reduce the overall interest as much as possible.
Consider Prepayments
Making prepayments is especially useful if you have taken a floating rate home loan. Lenders don’t generally charge interest on prepayments in case of floating rate loans.
So, you should seriously consider making prepayments every month in order to reduce your principal interest which in turn, would result in you having to pay lesser interest overall. This is because, in the initial tenure of your loan, your payments will be towards the interest rather than the principal amount.
In case you have a fixed-rate loan, lenders do tend to charge interest on prepayments as well. However, you should still consider them because the overall interest you will end up paying will be ultimately reduced.
Increase Your Down Payment
Most banks tend to finance about 75%-90% of the total value of the property you are taking the loan for. The remaining percentage of the value will have to be paid for by you.
An excellent idea to reduce the interest on your home loan is to increase the share of the property that you are paying for. Instead of paying the least percentage, pay as much as your finances allow you to. This will reduce the loan amount that you are borrowing. Thus, with a lower principal amount, the interest you have to pay will reduce as well.
However, you need to be pretty careful when using this tip. Don’t overspend in hopes of reducing your interest or you will face trouble meeting the monthly installment demands and other important finances that come along with a new home.
Improve Your Credit Score
Lenders prefer to provide home loans to people who have a high credit score. It’s like a proof for them that the borrower tends to pay their loans on time. Moreover, many banks tend to offer better terms to people who have a good credit score.
If you have been a good borrower in the past, it will reflect on your score and you will be able to get better deals that are more suited to your financial position. Without a good score, it can be a bit difficult to get a home loan that suits the conditions you want and you will end up having to pay a higher interest amount.
You can also keep an eye out for special events and occasions because several banks tend to lower their interest rates to attract new customers.
Try Home Loan Balance Transfer
When you start making prepayments on your home loan, you can consider transferring your loan amount to another bank or lender. If you feel that the interest rate being charged by your lender is higher than something that is being offered by a different bank, you can transfer the principal amount.
However, keep in mind that this is a very tricky solution to pay lower interests. Missing even one payment on a transferred loan generally attracts a high fine which will cancel out any amount that you have saved on the interest.
These tips are the best ways to ensure that you don’t have to pay costly interest rates on your home loan.