As adults, we look forward to settling down with our families in our own homes. Buying a property involves large capital, and this is a major concern for many. The immediate solution that one can think of is to look for top home loan options – specifically a low-interest loan from banks or other financing companies. There are many things to bear in mind before applying for a home loan. Among other factors, the CIBIL score plays a vital role in affecting your home loan application. Since this involves a high principal amount, paying the EMI will be tough on the borrowers. It becomes a bigger problem if the EMI is more than 50% of their monthly income, leaving them with almost nothing to handle other expenses. So here are the top tips to reduce your home loan interest rate.
Making a higher down payment
A down payment is an upfront payment you make while purchasing a vehicle, a home or any other asset. It is the portion of the purchase price that you pay with your own funds as opposed to availing a loan. One way of reducing your home loan interest rate is by paying off a bigger chunk of the principal amount as down payment. Doing this will take a huge burden off your shoulders. This way, the loan’s principal amount reduces thus lowering the interest rate and EMI payments.
Refinancing your loan
Borrowers can resort to refinancing the outstanding loan to reduce the interest rate. Banks and other lenders often lower the home loan interest rates at different periods. This way, you get to save on the interest by shifting to a lender who offers a lower interest rate. To make the switch, all you will have to do is go through a loan appraisal process, rework the necessary documents and pay the loan prepayment fee.
Prepaying a big sum
Money flow does not remain the same all through the year. A promotion or a raise means you have a higher salary at your disposal which you can use to make a lumpsum payment. There are also many financial apps for your new home to help you watch where your money goes. If you have received a big festive bonus or an increment for your performance, directing that money towards your loan can drastically bring down your loan tenure. This lowers the outstanding principal amount. It is advisable to make this payment during the early years of your loan repayment tenure.
Paying an extra EMI
If you can set aside some amount of money annually, either as a result of an annual bonus or savings, paying that as an additional EMI would be the smart thing to do. This way, you not only save up on interest but also finish repaying your loan much earlier than expected.
Increasing your EMI annually
When your net income increases annually, the borrower can choose to increase the EMI by a small percentage. This will help to save interest. The increase in home loan interest rate will be determined by the bank based on the increase in the borrower’s income.
Using your home loan to refinance other loans
If you’ve got some other expensive loans like personal loans, credit card loans, or even car loans, then you can take an add-on on your home loan to repay the personal loan. Now, you can use the EMI set aside for your personal loan to repay your home loan at a much faster rate.
Switching to MCLR
All home loans availed after April 2016 follow the Marginal Cost of Funds-Based Lending Rate (MCLR). Here the borrower can profit from the change in home loan interest rates. The home loans that have been availed before April 2016 are eligible to be switched to MCLR and will be subject to taxes and a conversion fee. This conversion fee amount is a percentage of the outstanding loan that has not been repaid yet. Hence it is safe to do a cost analysis to understand if transferring the home loan to MCLR would be financially viable.
Paying more to reduce interest outgo
Paying a larger EMI amount for a shorter tenure will help cut the interest outlay. If you opt for a low-cost EMI for a longer tenure, you will eventually have paid more interest than if you choose to pay a higher amount over a shorter period.