M_Id_422344_Home_loan_burdenThe decision has been made and you are on the verge of signing the dotted line for the home loan of your choice.

Very soon, you may move into the house of your dreams and begin to pay for it with a part of your savings and income every month.

Things may seem to be going well in the beginning, till you gradually realize there are several factors in terms of household expenses that you had not taken into consideration.

Expensive schools for the children, annual holidays to exotic locations, monthly entertainment and social life expenses, unanticipated medical or legal expenses and much more.

Suddenly the home loan is a much bigger burden than you anticipated.

This is a common scenario for many home loan borrowers. Often, people realize, a little too late that they may have bit off more than they can chew.

If you find yourself in a similar position or feel you may be headed that way, here are some tips to help you make a few better choices and adjustments to manage your home loan and other financial commitments better.

Before you take up a loan ask yourself these two questions:

  • How affordable is the EMI you are opting for? Double income families believe they can take on a higher EMI simply because they are eligible for it. Calculate monthly expenses and ensure that you can stick to your current lifestyle, while taking on the burden of the EMI.
  • Can you pay a bigger down payment? Banks grant loans on net pay and not on savings – this is a fact, many don’t take into account. It is important therefore to take on an EMI of a value that you are comfortable paying. Choose to pay a large down payment, even if it means holding on for a while till you save enough. If a larger down payment is not a possibility, consider a home that costs less.

After this, once you have signed up for a home loan and begin paying it, here are some tips that will help you manage your existing and potential financial commitments, along with your home loan.

  1. Reduce Extraneous Expenses: Create a ledger to analyze your monthly expenses apart from your home loan EMI. Note down every expense to help you understand where your income goes. From these details, you will be able to decipher where a reduction in expenses is possible. Do you eat expensive meals outside often? Is retail therapy something you indulge in often? Do you plan to take on another loan for a big ticket purchase? Cut down on unnecessary expenses and put away this money in an account to service your loan.
  2. Create a Home Loan Servicing Account: Managing your monthly expenses as well as your home loan from a single account can be tedious. You will easily lose track of where you money is going and will find yourself in a crunch often. Instead, you may choose to do what Mr. and Mrs. Rao did with their home loan.

Since a bank loan is provided on net pay of both applicants based on statements provided, they decided to split expenses clearly between their two accounts. Mr. Rao’s account, with the higher income, would service the home loan and other everyday expenses. Mrs. Rao’s account would then be used for savings and the creation of a contingency fund. This helped the couple prioritize and ensure that there was no confusion in terms of liabilities.

  1. Make Plans for an Emergency: The couple also decided on the creation of a corpus fund to finance any emergency. They did this by creating a fixed deposit account in the same bank that financed their loan. They also invested in home loan insurance for their loan. This is the kind of insurance that cover the family’s liability to pay EMIs should anything happen to the principal borrower(s). It ensures that all future EMIs will be paid and a family’s future is secure.
  2. Channel Income Wisely: Annual bonuses, sudden windfalls may make you a happy person. Don’t spend this money frivolously. Instead, stash it away to pay your home loan. Alternately, collect the amount and make a pre-payment on your home loan if you are eligible it. This will help bring down your EMI and consequently reduce the burden on your household expenses. Should you suddenly face a financial crisis, approach your bank for a step down EMI where you may reduce the amount payable for the duration of your crunch and then bring it back on track.

Working out your finances when taking on a home loan is about anticipating current and future needs. Having contingency funds to balance your finances is always a good idea.

Take-aways

  • Double income households tend to take on a larger EMI than they can handle, simply because they are eligible. Rethink this approach.
  • Pay a higher down payment and attempt to pre-pay parts of your loan where possible
  • Have separate accounts to finance the loan and your everyday expenses
  • Always have contingency funds in place to ensure household expenses are not disrupted when you pay a home loan
  • Invest in home loan insurance to safeguard your investment and your family

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