Buying a home is a dream come true for most homebuyers. It is one of the most significant financial decisions an individual makes. Usually, aspiring homeowners turn to getting a home loan to convert their aspirations into a reality. A well-managed home loan makes the goal easily achievable, and many people prefer funding their purchase with a loan even if they have the money to pay upfront. After all, availing of a loan comes with a bouquet of benefits, including tax reductions. However, one may spend more due to high home loan interest rates.
In the post-pandemic world, the interest rates are at their all-time low, making it an ideal time to avail of a home loan. The above seven points cover everything one needs to know about reducing home loan interest rate. Those looking for a home loan must use these tips to reduce their interest rates and lead a stress-free life in their dream home.
There are ways to reduce home loan interest rates. Here we have listed some fool-proof methods to minimise the home loan reducing interest rate, so you save your hard-earned money without burning a hole in the monthly budget.
We have outlined 7 essential tips to reduce home loan interest rates here:
1. Compare the Interest Rates
Conduct thorough research to compare the interest rates before finalising a lender. Online research will give a clearer picture of all the charges one has to pay while availing of a home loan. In-depth knowledge of different lenders’ interest rates helps narrow down the choices. Besides, lending institutions offer lower rates to their existing customers and those with excellent credit scores.
2. Maintain an Excellent Credit Score
A credit score reflects how responsibly an applicant deals with borrowed credit. A score of 750 and above is considered excellent as it indicates sound financial health. Lenders perceive such applicants as reliable borrowers and offer them lower home loan interest rates. Those with a low credit score probably have a history of delaying or missing EMI payments. Keeping track of the payment history, the amount owed, credit types and credit length is essential to improve the credit score.
3. Make a Bigger Down Payment
A planned approach to buying a house using a home loan is beneficial. Taking time to save money and making a bigger down payment will help an applicant reap the benefits of a smaller loan tenure and a significantly lower interest rate. So, before you apply for a home loan, ensure borrowing less by making a bigger down payment to lower the interest rate.
4. Opt for a Shorter Loan Term
The loan tenure is one of the primary factors determining the interest rate. While the EMI amount comes down with a longer repayment term, the borrower will increase the total interest outgo. However, opting for a shorter tenure will slightly increase the EMI amount but drastically reduce the overall payable interest. Hence, choose the repayment tenure carefully using a home loan EMI calculator and save money.
5. Pre-Pay Whenever Possible
Each EMI comprises two components: the principal amount and the interest charged. The initial stages of the loan tenure include more of the interest cost rather than the principal. Making pre-payments is a sure-shot way to reduce the interest cost. Whenever the borrower gets a salary hike, bonus, or increment, they may use it to pre-pay the loan partly or wholly. Doing that will reduce the principal and the interest cost.
6. Never Skip EMI Payments
Failure to pay EMIs for a few months deems the borrower a defaulter, and the lender gets the right to take legal action against them. The lender sends a notice asking the borrower to clear their dues before a specific date, failing which they may receive hefty charges and even lose the property’s possession. Besides that, even a single missed payment decreases the credit score by 50-70 points. Although most lenders offer waivers for a few months, approaching the lender to request an EMI-free period may help during a financially challenging situation.
7. Refinance the Home Loan
Most financial institutions try to retain their good customers and oblige. Those who did not receive favourable terms and conditions from their current lender may approach them and request a reduction in the interest rate. Ask the lender to match a competitor’s rate or ask them to reduce the interest rate based on your consistent repayment history. However, if the current lender does not reduce the interest rate, use the home loan balance transfer option to get a better rate.
A home loan balance transfer is a facility in which the borrower transfers the outstanding loan balance to a new lender offering a lower interest rate. Transferring the loan is the right time to adjust the loan tenure according to the current repayment capacity and get a lower interest rate according to the improved credit score.