When you are looking to buy a house, one of the major factors is the budget you have. This budget in turn depends on two things. First, your ability to bring in the required down payment and secondary, your ability to service the future monthly EMIs.
What is the right amount to borrow is a simple question. But it can have unique answer depending on person’s financial situation. Experts say that both under- as well as over-borrowing are dangerous. So how do you decide what is the right home loan amount?
Let’s look at some of the important factors.
Income Stability – If you have an income source that is stable and reliable, then you can a steady source of income or your job is stable then you may opt for higher Home Loan amount. But if you are not very sure about your future income level, then you should reduce the loan amount to the bare minimum. If it means that you will be paying more than 20% as down payment, then so be it.
Other EMIs – If you already have a few EMIs running (like care or personal loan), then its best to clear major ones first before going for a home loan. It is not easy to service 3-4 EMIs simultaneously. But if you don’t have a choice and will necessarily have to service 2-3 loans simultaneously, then take a home loan with long tenure to reduce your EMI outgoes initially. As and when your income increases, start prepaying the loans that have higher rate of interest first.
Increase Down-Payment – If you are planning to put in only 20% as down payment and have money parked in bank FDs, then this approach can be questioned. Bank FDs earn about 6% post taxes whereas loan requires you to pay 10-12%. So keeping the money in low-interest earning instruments when it can be used to decrease the amount for borrowing, doesn’t make sense. So if you think you are convinced, you can reduce your home loan amount by liquidating some low-interest earning assets and use to it increase your down payment.