The home loan is a popular finance product that enables an individual to buy a property. It is also one of the most important debts that a person takes on their life. Incidentally, it also comes with many myths that can mislead a potential loan borrower. To better understand home loans, it is vital to dispel the misconceptions and understand the facts.
Myth #1: Only low-interest rates are the best
It is one of the first and foremost myths concerning a home loan, that the lower the interest rate, the better the loan. While it is not so in reality, the interest rate is calculated based on the applicant’s credit score, income, repayment history, and so on.
Moreover, it is also essential to consider other parameters like the valuation charges, processing charges, and so on. These charges might be on the higher side that will overall increase the cost of the home loan. It is prudent to compare different loans thoroughly before going for the loan that offers a low-interest rate.
Myth#2: High-Interest rates mean heftier repayments
Once a hike happens in the interest rates, the instant reaction of the borrowers is panic. It is due to the myth that a hike means an increased Equated Monthly Instalments (EMIs) and unstable monthly budget. In fact, this is the biggest misconception regarding home loans.
Whenever there is an increase in home loan interest, most financial institutions just extend the loan tenure to keep their customers comfortable. However, there is a catch in extended EMI tenure because it will increase your overall interest payout. In case you don’t want to extend the tenure, you need to inform the lender beforehand.
Myth#3: Pre-payment attracts penalty
This myth is not necessarily true; generally, prepayment penalties are levied only during the initial years of your home loan tenure. In fact, the RBI has stopped the collection of prepayment penalties on floating interest loans.
Likewise, for fixed interest loans, prepayment penalties cannot be levied after a specific number of years (like 4 or 5 years). It enables the borrower to close off the home loan without any penalty charges. However, pre-paying your loan only makes sense during the initial years of loan as your interest payment will be more. Moreover, the home loan and its interest payments are eligible for a tax deduction.
Myth#4: If your credit score is low, your home loan application is rejected
Another common myth regarding home loan is the credit score requirement. You need to understand that having good credit is necessary, but it is not the only requirement. The other factors of age, income, current loan obligations, and so on also play a part in approving your home loan.
Furthermore, while formal banking institutions are quite strict when it comes to credit score, so is not the case with Non-Banking Financial Companies (NBFCs). They offer loans to individuals who have a low credit score but fulfil their other eligibility criteria.
Myth#5: The fixed interest rate is better than the floating interest rate
Many home loan borrowers lean towards the fixed interest rate scheme under the impression that is better than a floating interest rate. The basis of that belief will be credited to the unstable market. But, in reality, floating interest rates are a far better option.
They are usually lower than fixed interest rate by 1.5-2% that results in better savings. Also, the ups and downs of floating interest rates do not happen for the long-term. You can significantly save higher on home loan repayments when opting for a floating interest rate.
Myth #6: It is better to go for shorter tenure
Basically, a home loan is a loan that can go up to two decades or more. But, the common misconception is that going for shorter tenure proves beneficial in the long run. In fact, It is quite the opposite, because you would end up paying higher EMIs that would leave little or no room for saving.
It has also become challenging to handle any sudden expense. So, while short tenure loans help you become debt-free, it also restricts your financial independence. So, it is better to opt for a home loan that is comfortable for the loan borrower to repay.
Myth#7: RBI fixes the interest rate
The Reserve Bank of India (RBI) is responsible for giving a broad spectrum of interest rates to financial institutions. Nevertheless, it is not directly responsible for setting individual home loan rates. The lenders decide the interest rate based on the quantum of loan taken by the individual. So, home loan interest rates may vary from individual to individual.
Myth#8: Interest rates are not negotiable
Home loan interest rate is non-negotiable, is the widespread belief when it comes to home loan myths. That is not true when the fact is quite the opposite. If you are not happy with the interest rate quoted by the lender, you can ask for a revision.
Additionally, if you have a good credit score, you can cite your past financial behaviour and lower the interest rate. However, to get a better loan that is suitable for your needs, you search in an online financial marketplace and compare lenders. It will also help you know what other costs are associated with the loan.
Myth#9: The Automatic validation of property title
One of the most common home loan myths where the approval of home loan means the property title is clear. In reality, a home loan is just like a personal loan where your property documents act as collateral. The buyer is solely responsible for the title property title. Even though the Real Estate Regulation Act (RERA) is enforced, the responsibility rests on the buyer to know the authenticity of the property title.
Myth#10: Ignoring property insurance
A standard clause that is often overlooked in loan agreements. The home loan borrower should have property insurance to protect their property from natural calamities like floods, earthquakes etc. The lender will add the cost of the property insurance premiums to your home loan, and you can pay along with your EMIs.
Ensure to have a detailed discussion with your lender and reach an amicable solution in the matter of property insurance. Or else, it will be a financial deterrent in the future. These are some of the prevalent myths concerning the loan. A home loan is your ticket to become a property owner; so it is a crucial need that you understand this financial product thoroughly before choosing a lender.