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Business News/ Money / Personal Finance/  Applying for home loan: How to negotiate to get a better interest rate?

Home buyers have been paying almost 20% more in their EMIs over the last two years as per research by ANAROCK Group. The total interest payable over a 20-year tenure is now more than the principal amount. So, when planning to buy your dream home, individuals should be well versed with the home loan rates and the rules associated with them.

In an email interview with Livemint, Mahesh Shukla, CEO & Founder, PayMe talked about Cibil Score, additional charges associated with a home loan, and risks associated with opting for a variable interest rate on a home loan. 

How can one negotiate or get a better interest rate on a home loan?

To achieve a better interest rate on a home loan, one should consider several strategies. Primarily borrowers should research and compare interest rates from multiple lenders, such as banks, credit unions, and online mortgage lenders. Credit scores can be improved by paying bills on time, reducing credit card balances, and correcting errors. To reduce the loan-to-value (LTV) ratio, which can lead to a lower interest rate, paying a large down payment amount can be helpful. Borrowers should also consider buying points, which are fees paid upfront to the lender in exchange for a lower interest rate.

Are there any additional charges or fees associated with home loan interest rates?

Availing home loans is a big decision for any individual, and in some cases, lenders may not be upfront about the different charges involved. In most cases, there is an additional processing fee which is charged by the lender for processing the loan application. It is typically a percentage of the loan amount.

Lenders often require a professional appraisal to determine the market value of the property. The borrower is usually responsible for this cost. Also, when a borrower closes on the home loan, s/he may be required to pay the interest that accrues between the closing date and the end of the month. Other additional charges may involve, recording fees, private mortgage insurance, survey fees, credit report fees, etc.

Can existing home loan borrowers switch to a different lender for a lower interest rate?

Existing home loan borrowers can switch to a different lender for a lower interest rate. This process is known as "home loan refinancing" or “loan refinance". Refinancing allows borrowers to replace their current home loan with a new one from a different lender, ideally with better terms, including a lower interest rate.

What are the risks associated with opting for a variable interest rate on a home loan?

Opting for a variable interest rate on a home loan can be beneficial in certain situations, but it also comes with risks that borrowers should carefully consider. Variable interest rates, also known as adjustable-rate mortgages (ARMs), can fluctuate over time based on changes in market conditions and economic factors. The most significant risk with a variable interest rate is that it can change periodically, leading to fluctuations in the monthly mortgage payments. If interest rates increase, mortgage payments may rise, potentially putting a strain on the budget. Also, with a variable interest rate, it becomes challenging to predict future mortgage payments accurately. This can make financial planning and budgeting more difficult, especially for those with fixed incomes or tight budgets.

What are the factors that affect a person's CIBIL score?

A person's CIBIL score is a crucial factor in lenders' credit application evaluations. Key factors affecting a person's CIBIL score include payment history, credit utilization ratio, credit mix, credit history length, new credit applications, public records, derogatory marks, total outstanding debt, and credit account age. A healthy mix of credit types, a longer credit history, cautious application of new credit, and avoiding negative marks can all impact a person's credit score. Total outstanding debt, including loans and credit cards, can also impact a person's score. Regular monitoring and responsible credit behavior are essential for maintaining a healthy credit score.

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Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Updated: 05 Aug 2023, 12:43 PM IST
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