Help: Home loan Financing is very expensive?

[indian_imgrnt]

Gurus! please help

This is my first time looking at real estate investment in India. I am kinda shocked with interest rates 9%+ even for SBI after teaser rate ends.
Now I ran amortization table and noticed that on a loan of about $50K (converted to USD for easy calculation), loan term 20 yr, rate 9%:

After 05 yr: Int. Paid : $21677 and Loan Balance: $44236
After 20 yr: Int. Paid : $57969 and Loan Balance: $0

Looking at this, I am not able to make a decision to get loan, because 40% of the appreciation in first 5 year will be given to Bank, or 116% after loan completion, in that case what will I get as appreciation?

Now, on contrary, I see people are rushing to get loan and get RE in India. Now what is that I do not see here? Please help.
Thanks

[smartfool]

are you assuming a constant eaxchange rate?
are you assuming a constant inflation?
are you assuming that the price of the property as in EMI/asset price will appreciate same as would in US?

[dbs]

You have not factored in the use you will be putting the flat to during this period.

[indian_imgrnt]

Thanks for your questions.
Yes, I am not considering the use because it will be locked all the time as I have no plans of renting it and will use it or sell (to get bigger place) it after R2I.
I found the missing piece in my original post, it is: Unlike US, in Indian loan (SBI) the EMI is calculated based on Un-Paid Principal Balance. So if you make extra payments, your EMI will adjust, you will pay less interest and payoff sooner. However, in US, if you make extra payments, your Principal will be reduce resulting shortening your loan term but it won't change your EMI. So while you do more sweating bank won't do any, and they want all their money as per loan origination docs.
This is game changer for me. I am for Loan from SBI.
Thanks, hope it helps someone.

[gwldaddu]

Thanks for your questions.
Yes, I am not considering the use because it will be locked all the time as I have no plans of renting it and will use it or sell (to get bigger place) it after R2I.
I found the missing piece in my original post, it is: Unlike US, in Indian loan (SBI) the EMI is calculated based on Un-Paid Principal Balance. So if you make extra payments, your EMI will adjust, you will pay less interest and payoff sooner. However, in US, if you make extra payments, your Principal will be reduce resulting shortening your loan term but it won't change your EMI. So while you do more sweating bank won't do any, and they want all their money as per loan origination docs.
This is game changer for me. I am for Loan from SBI.
Thanks, hope it helps someone.

Sorry to say but you are confused with your calculations.. You are saying that in India, if you payoff extra, your EMI will adjust accordingly but then you also say that you will pay off earlier. EMI will adjust to what? Make it lower? If it makes it lower, then how will you payoff in less number of years?

As far as I know, if EMI is fixed (as in case of US loans) and if you make extra payment in a month. Then your loan balance reduces. So, now since EMI is fixed, your next payment will have more payment towards principal and lesser towards interest. In effect, you will end up payingoff loan in less number of years..

So to payoff in less years, EMI has to be constant..

Regarding your query as to why you would pay so much to banks.. well, thats how this game is. You want to buy something that you can not afford by cash. you take loan, banks give you loan, you pay over time. But then you end up paying too much to banks... This is the game, you like it you play. You dont like it, you dont play..

I personally do not like it... But am forced to play here in USA..

[gwldaddu]

Sorry to say but you are confused with your calculations.. You are saying that in India, if you payoff extra, your EMI will adjust accordingly but then you also say that you will pay off earlier. EMI will adjust to what? Make it lower? If it makes it lower, then how will you payoff in less number of years?

As far as I know, if EMI is fixed (as in case of US loans) and if you make extra payment in a month. Then your loan balance reduces. So, now since EMI is fixed, your next payment will have more payment towards principal and lesser towards interest. In effect, you will end up payingoff loan in less number of years..

So to payoff in less years, EMI has to be constant..

Regarding your query as to why you would pay so much to banks.. well, thats how this game is. You want to buy something that you can not afford by cash. you take loan, banks give you loan, you pay over time. But then you end up paying too much to banks... This is the game, you like it you play. You dont like it, you dont play..

I personally do not like it... But am forced to play here in USA..

Ok.. you were already confused and my quick post above might have confused you more.. So, here is a simple explanation.

Say, your EMI is Rs 100/month. Say in May 2010, 20 was supposed to go to principal and 80 goes to interest. Now I gift you Rs 10,000. You pay it to bank towards this loan. Your loan balance reduces. So, your interest for May 2010 is say 60 only.

There are two options now.

1. EMI stays same to 100. So, now in April 40 goes to principal and 60 goes to interest. Net effect, you will pay off in less number of years
2. EMI reduces (as you said) to 80. So, 20 goes to principal and 60 goes to interest. Net effect, you pay lower EMI, which you wanted. But then, you payoff in same number of years.

You have mixed up two in your OP.

Please note that I have tried to oversimplify the calculations here. The numbers are hypothetical and might not be logical. However, I think, it makes point clear.

Thanks…

[us2des]

The equation is very simple..... For your investment if % Appreciation rate is greater than Cost of Capital % then this is a good investment.
*Cost of Capital = (loan*loan int rate + down pmt * potential % return you can earn by investing elsewhere - rent earned by renting it out or rent you will not have to pay by staying there yourself)/Total property value

You can keep it very simple by assuming that your int rate and elsewhere investment return is almost the same. In that case you don't need to worry about how much down payment is made or if you make additional early payments etc all. Alternatively, you could add other details to this equation by adding in costs or benefits such as maintenace payments, tax deduction on int paid, property taxes, and so on, but the simple equation above will get you 90% of the way anyway.

Now guessing the appreciation rate is where the real problem is!

[pillutla]

The equation is very simple..... For your investment if % Appreciation rate is greater than Cost of Capital % then this is a good investment.
*Cost of Capital = (loan*loan int rate + down pmt * potential % return you can earn by investing elsewhere - rent earned by renting it out or rent you will not have to pay by staying there yourself)/Total property value

You can keep it very simple by assuming that your int rate and elsewhere investment return is almost the same. In that case you don't need to worry about how much down payment is made or if you make additional early payments etc all. Alternatively, you could add other details to this equation by adding in costs or benefits such as maintenace payments, tax deduction on int paid, property taxes, and so on, but the simple equation above will get you 90% of the way anyway.

Now guessing the appreciation rate is where the real problem is!

Thanks you for bringing up this point. Could you please clarify the formula once more time?

[sftrade]

That is why one needs to pay off the loan in 5-10 years. remember if you put money in an Fixed deposit you will get 5% + so the cost of borrowing for the banks is high as well. US loan mortgage is highly unrealistic since the Fed prints its own money and the dollar is the reserve currency. The rest of the world doesn't have it so easy. The best thing for US based borrowers is to get a loan in USD in the range of 5-7%. Many times credit cards can be used when they offer 0% apr for 9 months with a 3-4% transaction fee. If you can get 30,000$ loan which can be rolled over year after year one couldn't ask for more. I know some people who did this before the crash so they were able to use USD loan arbitrage to finance their Indian homes. Same goes with cars as well. You can get 0% APR for 5 years with 1,000$ down today in the US. Tell me if you can get this deal in India

[returning_indian]

Gurus! please help

This is my first time looking at real estate investment in India. I am kinda shocked with interest rates 9%+ even for SBI after teaser rate ends.
Now I ran amortization table and noticed that on a loan of about $50K (converted to USD for easy calculation), loan term 20 yr, rate 9%:

After 05 yr: Int. Paid : $21677 and Loan Balance: $44236
After 20 yr: Int. Paid : $57969 and Loan Balance: $0

Looking at this, I am not able to make a decision to get loan, because 40% of the appreciation in first 5 year will be given to Bank, or 116% after loan completion, in that case what will I get as appreciation?

Now, on contrary, I see people are rushing to get loan and get RE in India. Now what is that I do not see here? Please help.
Thanks

In a country where inflation is so rampant, 9% borrowing cost is not bad. 20yrs is a very long time for property to not offer appreciation of more than 100%. Dependent on your investment locations you can get more than 100% appreciation in less than 5yrs. The way it was working back from 2004, people were getting 100% within few months. Some properties appreciated 400-500% in span of 3-4yrs. Some even more. That is why people were rushing to get loans and buy properties. They used high leverage to make obscene amount of money.

Even now savvy investors in India do not invest unless property is offering 50-100% per yr. And then there are rest of us, who help them achieve those returns.