Thursday, June 21, 2007

Home Loan tips and tricks

While I was frantically searching for a home loan, I happen to see some tips and understand some tricks.

1. Banks are never under loss
Will ever the loan lending bank reel under loss if they finance a home and the borrower defaults? NO, for PSU banks, for private banks, they use some unparliamentary means to recover the money back.

Before approving a home loan the bank checks for sufficient credibility of the borrower. As per the general trend, the borrower would be paying the EMI for a few years. During those initial years the bank will recover most of their interest part of the loan. And since the home is mortgaged to the bank, they can recover the capital from the home.

2. When to prepay?
The best time to do prepayment is the initial years after taking the loan. Since the initial years are the period when the bank recovers a lot of interest. If you see the EMI calculation, during the initial years, most of the EMI goes towards interest.

3. On prepayment, what to reduce?
Some banks gives you the option of either recalculating the EMI or period of loan on prepayment. The best option is to reduce the period of loan. Because you pay less on reducing the period and keeping the EMI constant.

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