Home loans are long-term, big-ticket loans. These loans go on for decades. Therefore, even a small difference in the home loan interest rates offered can help one save a considerable amount of money and also reduce the cost of borrowing the loan. If you are planning to apply for a home loan here are a few tips you can use to reduce your home loan interest rate.
Effective Strategies to Reduce Home Loan Interest Rate
1. Maintain an Excellent Credit Score
Lenders decide the home loan interest rates to be offered to a borrower based on several factors, such as their current income, age, debt-to-income ratio, etc. One of the important factors that affect the home loan interest rates that an applicant gets is their credit score. The credit score is a three-digit number between 300 and 900 that reflects a borrower’s repayment capacity. A high credit score, i.e. anything in the range of 750 to 900 indicates high repayment capacity and almost zero chances of defaulting on loan repayment.
Therefore, when borrowers with a high credit score apply for a home loan, they may get approved for a loan sooner. More importantly, such individuals can negotiate with the lender to sanction them a home loan at the lowest interest rates possible.
2. Improve Your Home Loan Eligibility
Before applying for a home loan, go to your preferred lender’s website and check their eligibility requirements. Make sure you meet all the qualifying criteria such as age, employment, credit score, etc. Doing so would allow you to become negotiate with your lender for a low home loan interest rate.
3. Reach Out to as Many Lenders as You Can
If you want to reduce your home loan interest rate, you must reach out to as many lenders as you can. Doing this will allow you to get a clearer picture of the home loan interest rates you are eligible for. Further, this exercise will also give direction to your negotiations. Once you know the home loan interest rates you can get, you can negotiate with your current lender using the offer letter you have from the other lender and convince them to sanction you a loan at a lower home loan interest rate.
4. Opt for a Shorter Tenor
If you want to reduce your effective home loan interest rate, the first thing you must do is opt for a short home loan tenor. When a borrower opts for a short home loan tenor, the interest payout on the loan goes down, which causes the effective interest rate to go down too. Therefore, borrowers who would prefer to pay higher EMIs can opt for a shorter home loan tenor as this helps reduce the effective interest rate and also allows one to become debt-free sooner than anticipated.
5. Make Prepayments Whenever You Can
Prepayment refers to the process of making lumpsum payments towards one’s home loan. When an individual makes a prepayment, their loan principal goes down. This either helps bring down the loan EMIs or the loan tenor. In either case, when a borrower prepays a loan, their loan principal goes down, which reduces the total effective interest payout on the loan. This, in turn, helps reduce the effective home loan interest rates.
6. Increase Your EMIs to Match Any Increase in Your Income
Whether you are salaried, professional, or self-employed, it is only expected that your income will increase with time. If you want to reduce the effective interest rate on your home loan, increase your loan EMIs to match any increase in your income. For instance, if your income increases by 10%, increase your home loan EMIs by 10%. This will help you repay your entire home loan before the agreed loan tenor and save on interest, which in turn, will help you reduce the effective interest rate on your loan.
7. Choose to go for a Home Loan Balance Transfer
The home loan balance transfer is a facility that most lenders offer these days. Using this facility, individuals repaying their home loan can transfer the balance on their home loan to another lender during their home loan tenor. In general, borrowers opt for a home loan balance transfer when another lender is offering them better loan terms and conditions, such as a longer repayment tenor or a lower home loan interest rate.
If you balance transfer your home loan or get it refinanced at a lower home loan interest rate, you may be able to reduce the effective interest payout on your home loan and reduce the total cost of borrowing the loan.
Individuals planning to apply for a home loan can make use of the home loan eligibility calculator to calculate the loan amount they are eligible for. They may also use the home loan EMI calculator to know their EMIs in advance, select the right combination of loan tenor and loan value for them, and make sure they are borrowing a loan amount they will be able to easily repay. Keeping these simple things in mind will enhance one’s chances of getting approved for a loan and availing of the loan on low home loan interest rates.
