Inadequate product awareness while availing of home loans often makes you fall prey to various misconceptions surrounding home loans. As a result, you end up making sub-optimal decisions.
Here are some of the common myths surrounding home loans that you must know:
- It is best to avail a shorter loan tenure
Many lenders provide home loan tenures of up to 20 years based on your age. As shorter repayment tenure results in lower interest components, you may be inclined to avail of shorter tenure. Doing so may make you miss out on your monthly contributions towards your important life goals. Not contributing towards your life goals may propel you to take up high-interest-cost loans later to attain those life goals. Additionally, opting for aggressive tenures without sufficient buffers can even propel you to default on your home loan EMIs during financial contingencies or periods of job loss. This in turn can negatively affect your credit score and thus your future credit eligibility.
Instead, you must choose loan repayment tenures that permit you to repay your EMIs comfortably after factoring in your contribution towards life goals and emergency funds. As home loans generally are available at a floating housing loan interest rate, you can always make prepayments on receiving huge surpluses at zero penalties.
- Low home loan interest rate must be the sole criteria to select any lender
Home loan interest rate is just one of the numerous factors you must consider when choosing a lender. Other important parameters include LTV (loan to value) ratio, processing charges, and repayment tenure. For example, a lender offering a lower home loan rate may require you to avail a lower LTV ratio, which will lead to a higher contribution from your own pocket towards the home purchase. Few lenders might offer a lower rate if you avail home loan for a higher tenure. Similarly, lenders providing the lowest interest rate may levy a higher processing charge and other fees. Hence, always consider the overall credit cost while comparing different options offered by different lenders.
- Having an excellent credit score assures home loan approval
A credit score is one of the home loan eligibility parameters factored in by lenders to check your credibility. Other crucial parameters include your monthly income, age, employer profile, job stability, location, etc. Each of the parameters play a major role in assessing your credit profile. Failure to meet any of the criteria may result in outright loan application rejection.
- Making prepayments attract penalty
Very few home loan lenders offer the option of a home loan fixed rate. Some lenders may offer mixed rate options where the rate for a few years may stay fixed and then become a floating interest rate for the remaining loan tenure. As RBI has disallowed lenders from incurring prepayment or foreclosure fees on the floating rate, home loans on floating rate do not require any prepayment charges from you. Also, in the case of a fixed home loan rate, lenders generally do not incur any prepayment or foreclosure fee if you make the prepayment through your own pocket.
- Fixed rates are better as compared to floating interest rates
You may consider a fixed rate to be better because it eliminates the possibility of rate volatility. Attractiveness towards fixed-rate enhances particularly during lower rate regime. However, remember, lenders generally charge higher rates for fixed-interest home loans to reduce their interest rate risk.
Conclusion
As a home loan requires a long-term commitment, it is incredibly crucial for you to make an informed decision and not blindly believe any myth. Doing so will ensure no space for mistakes or confusion when choosing a suitable lender. Once you have selected the lender, ensure to use the online home loan EMI calculator to compute your EMI and repayment tenure based on your repayment capacity. Next, keep documents required for a home loan handy for a smooth processing experience.
