Most of us have the ambition of moving into our own homes. However, finding the money to build your new house can be a nightmare if you don’t prepare adequately. The majority of home buyers finance their purchases using home loans.
You still need to come up with enough cash for the large down payment in addition to the EMI, which will deduct a sizable amount from your paycheck each month. Depending on how much you initially sought in the form of the loan, your EMI payment may vary.
Your financier’s assessment of your credit history can influence the amount you choose to borrow. Since most modern households have two working spouses, there is a significant probability that you will be qualified for a sizable sum.
It’s crucial to remember that just because you are qualified to apply for a significant amount doesn’t indicate that you should. Your bank determines your eligibility for a amount based on your net take-home pay. They don’t care how much money you can save.
Therefore, it’s crucial that you only seek money that you can comfortably repay. So what do you do? First, before taking a loan, be careful to save up as much money as you can. In this manner, you will have a sizable amount of money for the down payment and require less in the form of a loan.
If you have tried that and still feel the EMIs are too high for you, look for a house that is a little less ideal but is well within your price range. Just keep in mind that your money is going towards an asset with a decent chance of appreciation and not on some useless expense that will not benefit you in the long term.
How To Plan the EMI on Your Loan
Here are some strategies to make sure that your monthly finances are properly managed after you have saved enough and made the down payment:
- You first need to determine where your money is going, apart from your EMI and make an effort to reduce spending there. You must list all of your expenses for this to see where your money is going. For instance, if you discover that you spend INR 6,000 on eating out each month, look for ways to cut this amount. You can use a loan EMI calculator to calculate your monthly EMI and estimate how much money you need to keep aside for the same. You have to plan your monthly expenses around this EMI.
- Having a separate account for loan servicing is one wise method to keep a careful check on your spending. It is challenging to maintain track of an account when there are several debits in it. If you and your partner both work, it is critical that you agree on where debits will be made. For instance, one of you may handle household spending, whereas the other can handle lifestyle expenses. You will be able to regulate your spending more easily and develop greater discipline if you use different accounts to track various costs. Additionally, you can pinpoint the precise pattern of your expenses.
- Spending less is the only way to save money. You should put money down for a rainy day. There can be times when you will incur an unforeseen expense that will ruin your financial strategy. For instance, you may need to use the funds, set aside for your monthly EMI, if a member of the family is admitted to the hospital. You should have backup or contingency money in this situation. You will be labeled a defaulter if you do not pay your EMI because of such an emergency. This will lower your credit score. You need to have enough cash in your emergency reserve to cover up to three EMIs. From the moment you initially receive your house loan, you can begin to accumulate this emergency money that you can use when necessary.
- Another wise choice for investing whatever extra cash you have accumulated during a particularly prosperous month is mutual funds. A high-quality mutual fund will provide you with good returns over time. In addition, you can prepay a portion of your home loan so that the EMI amount or tenure decreases with the returns on your investment.
- Similarly, if you ever receive an un lump sum amount, utilize it wisely to prepay your loan partially. However, please do not give in to temptation and blow it on pointless luxuries. If you choose to prepay your loan partially, you can either lower the EMI payment or shorten the loan’s overall term. After reducing the EMI this way, your monthly cash flow will be more comfortable for you to handle. Even more helpful in this circumstance is shortening the loan’s overall term to lower the total amount of interest paid.
- You can also choose a step-down EMI option from some banks. You can temporarily lower your EMI payment if you select this option. A step-up EMI option can be used to increase it after your income and cash flow have stabilized.
- Prioritizing and organizing your debts according to their interest rates is advisable when you have several debts to pay off. You should first concentrate on paying back the debt with the highest interest rate. Future savings may result from paying off the loan with the highest interest rate. If someone has a credit card loan, a personal loan, a home loan, or a car loan, they should concentrate on paying off the credit card debt first because they usually have the highest interest rates. When compared to loans with lower interest rates, it is more likely to accrue penalties if payments are late. In addition, repaying a loan with a high-interest rate over a prolonged period entails paying more interest than repaying one with a low-interest rate.
- Getting a loan with low-interest rates is the greatest way to guarantee that you not only get the money you require but are also not burdened with EMI payments. Since interest rates and EMI amounts are correlated, a lower interest rate will result in a lower EMI. You must research and compare the rates provided by banks and non-banking financing firms (NBFCs) to locate the best offer available. Then, select the one that best suits your demands and ability to repay.
- Banks frequently provide loyal customers with good credit histories with additional discounts and loan programs. Choosing such a loan can ease your financial stress and make significant long-term savings. Therefore, obtaining a loan from the bank with which you already have an account or a long-standing business relationship makes sense.
P2P Lending – An Investment Opportunity to Reduce Your EMI Burden
We have discussed earlier that it is advisable to make investments so that the returns from your investments reduce your EMI burden and help you repay your loan more easily. While mutual funds are a good investment opportunity to pursue this strategy, there are other investment opportunities as well. You can make investments in safer options such as fixed deposits and government bonds. Consider investing in stocks only if you have a high-risk tolerance. But, if you don’t want low-single digit returns or high volatility on your investments, we have a better option!
One of the rapidly growing investment opportunities made possible by technology is P2P lending. It allows you to park your money from 1-5 years and earn compounded returns annually. It’s non-market linked. Making it the best of both worlds, the fixed maturity peer-to-peer investment plan from LenDenClub offers annual returns of up to 10–12% p.a*. on your investment.
Naturally, avoiding sticky financial circumstances altogether is the best course of action. Safety is one of the cornerstones of financial planning. You cannot avoid un ties in your life. Even while there is nothing you can do to change what is meant to be, it is advisable to be at least ready for unforeseen circumstances.