Purchasing a first home is one of life’s most monumental decisions–it is probably the most expensive asset and the longest financial commitment you will take on. It, therefore, needs to be approached with meticulous planning. Here are some of the most important considerations involved in your home-buying decision.
Buy vs. Rent: Before you even get into the process of buying a home, you need to ask why. Many financial planners will tell you that renting a home is far more economical than buying one. For example, if you were to rent a house that costs Rs. 2 crores, your monthly rent would be around Rs. 45,000 – Rs. 60,000. However, if you buy the same home, your monthly EMI would be approximately Rs. 1.5 lakhs, and you would be paying this for the next 25 years! So why would one buy?
The answer is that it is less a financial decision than a life one. Financial models cannot fully capture the stability and peace of mind that a permanent roof over your head provides. If you want a home that will always be yours, immune to the whims of the markets or landlords, you should buy. If you wish for financial freedom and do not have to worry about making income to pay rent, a home will be a great asset. But equally, if you prefer the flexibility of packing up and moving anywhere, anytime, you could keep renting. As you also should if you would rather spend more on your wants and experiences instead of a long-term fixed asset.
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Start Planning Early: Assuming a purchase, you will likely need a home loan. Start planning for this early, probably years before you take the loan. You will be expected to put down a down payment, usually 20% of the property value and start saving for it early. The interest rate offered to you will depend on your credit score, request a copy of your credit report from the major credit bureaus and review it for errors. Work on improving your credit score by paying debts and bills on time. Planning well in advance will save you lakhs in the future.
Take a manageable loan: You must be careful not to over-extend yourself when taking a loan and calculate your current income, expenses, and savings. Determine how much you can comfortably allocate towards EMIs and all the other ancillary home-ownership costs (property taxes, insurance, maintenance, etc.). As a thumb rule, the EMI should generally be at most 30% to 40% of your monthly post-tax income, though you should carefully review your budget and determine your affordability. Then, contact various lenders, compare interest rates, and choose the one that offers the best terms for your situation. Getting pre-approved for a mortgage will give you a clear idea of how much you can afford and make you a more attractive buyer to sellers.
The house hunt: This is the nicest part of the process for some. This is a personal preference, but I suggest you evaluate whether you want to buy a ready property or an under-construction one. Under-construction properties are usually more affordable but come with risks, the most significant being that the builder may not complete it on time and default. Therefore, be cautious and only go with the most reputed builders; if you can afford it, buy a ready property.
Close the transaction: Once you have finalised a property and negotiated a suitable price, you get into the final stage of closing the transaction. Lawyers and bankers should inspect all the paperwork to ensure everything is clear. Your bank should process the documents and sanction the loan. Your agent and lawyers will help you register the property. Remember that all these transaction costs add up and can cost anywhere from 5% to 10% of the property value. Once the deal is closed, you officially become a homeowner! Start shopping, arrange for the movers, update your address, and celebrate your new home with a joyous housewarming party!
The process of owning a home is arduous, and the long-term financial commitment can be overwhelming. But equally, it can be one of the most satisfying and comforting life decisions you can make. It is a personal choice, and whatever you choose to do is the right decision!
(By Rishi Piparaiya, Best Selling Author and Financial Mentor. Views expressed here are personal)