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Applying for a Home Loan – Be Aware of These Five Myths

Home Loan Myths: Before Applying for Housing Loan in India, check out the 5 common myths that you need to know about.

January 30, 2020 / 04:30 PM IST

A home loan is a financial service provided by banks and housing finance companies. It is one of the most significant debts you can take on. As such, it is incredibly crucial that you make informed decisions while taking on a home loan. Ensure that there is no space for any confusion or mistakes since this is a financial decision you have to live with for a significant part of your life. Thus, we’re bursting some home loan myths so that you don’t make any errors while taking on this high-value loan.

Myth # 1: Low-interest loans are the best

While every applicant would prefer to get the lowest interest rate against their home loan, it is often not practical. Firstly, the interest rate is determined by the lender based on several factors like your credit score, income, credit repayment behaviour, etc. Secondly, while a low-interest rate looks attractive, it could mean that you would have to cough up a higher down payment. As such, you have to opt for a lower LTV. As a result, you may not qualify for financing of 80%, the standard funding offered by home loan providers.

Myth 2: It is best to opt for a short tenure loan

At its core, a home loan is fundamentally a long tenure loan. The borrower remains indebted to the lender for up-to two decades. Most first-time borrowers believe that it is better to opt for short tenure loans. But people who choose short tenure loans typically end up paying high Equated Monthly Instalments (EMIs). High EMIs can seriously affect your monthly budget, leaving you with little to no room to save anything for financial emergencies. Thus, while short tenure loans help you become debt-free at a rapid pace; they aren’t necessarily ideal. It is best to opt for a mid-tenure loan with mid-range interest rates and affordable EMIs.


Myth 3 – Lenders reject loan applications if your credit scores are low 

All home loan providers ask you to provide your credit scores. Many applicants believe that if the credit score is less than 750 (out of 900) points, their loan applications will be rejected automatically and therefore avoid applying for the loan, at all. The fact, however, is that while banks are strict about credit scores, you still stand a chance to get the home loan approved by approaching an HFC for the loan. HFCs are willing to make concessions for borrowers with low credit scores, but they charge higher interest rates for doing so. 

Myth 4 – Fixed interest rates are better than floating interest rates

Many borrowers choose the fixed interest rate, considering them to be better than floating interest rates. They believe that since the market is unpredictable, it is better to stick to fixed interest rates. However, floating rates are generally better. Firstly, the floating rate usually is lower than the fixed interest rate by 1.5% to 2%, which results in a lot of savings over the entire loan tenure. Secondly, even if the interest rate fluctuates, the effects are not long-term, and the rate is typically adjusted within a month. You can save a lot more by opting for a floating interest rate than a fixed one. 

Myth 5 – Lenders charge prepayment penalties for closing the loan before the tenure

While formerly lenders did charge prepayment penalties for foreclosing home loans before tenure, it is not valid any longer. The RBI has restricted all banks and HFCs from levying prepayment penalties on floating interest rate home loans. In case of fixed-rate loans too, lenders cannot collect any prepayment charges, after a certain number of years (typically five years). Thus you can close off your mortgage without worrying about incurring any penalties towards prepayment. 

So keep these myths mentioned above and facts in mind while applying for a home loan.  
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first published: Jan 30, 2020 04:30 pm
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