Prospective homeowners usually get bogged down with the financial planning. Financial planners advise the 5/20/30/40 rule to ease the process — a tactical formula to bring financial security when buying a home. This report spells out a systematic method of how to buy a house without tightening one’s purse strings.
1. The 5 Rule: House Price Should Not Exceed 5 Times Annual Income
The initial phase of the 5/20/30/40 rule suggests that the purchase price of the house must not be more than five times a buyer’s gross income. If a person’s annual income is ₹12 lakhs, then they must buy properties with prices not exceeding ₹60 lakhs. This boundary helps homebuyers avoid unaffordable debts.
2. The 20 Rule: Opt for a 20-Year Loan or Less
The second part of the rule suggests availing a home loan of 20 years or shorter. Shorter tenure loans may have higher EMIs but reduce interest down payments in the long term, which makes it the cost-effective choice.
3. The 30 Rule: EMI Should Not Exceed 30% of Monthly Income
Money gurus emphasize that the Equated Monthly Installment (EMI) must never be more than 30% of the income of the consumer. For one who has an income of ₹1 lakh monthly, the EMI must at most be ₹30,000. This ensures that the house owner can well afford other payments.
4. The 40 Rule: Make a 40% Down Payment
The last step is paying a down payment of a minimum of 40% of the price of the property. For a house that costs ₹50 lakhs, the down payment should be ₹20 lakhs. Saving such an amount may take some time, but it dramatically lowers the loan burden and interest liability.
Challenges and Limitations
Though the 5/20/30/40 rule provides a formalized method, it might not be feasible for all, particularly in urban cities where real estate prices are on the rise. Experts suggest assessing personal financial conditions prior to following this rule strictly.
Following these simple principles, potential homebuyers can make an educated decision and achieve their dream of homeownership without entering a debt trap.
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