Like any other financial product, there are many myths around home loans, and often the borrowers fall prey to such misconceptions and make wrong decisions. Read on to know about the common myths about home loans and the truth behind it.
In India, many housing finance companies and NBFCs (Non-banking financial companies) provide home loans at competitive interest rates. From the borrowers’ point of view, a home loan is probably the most significant debt you may take. And, hence it is paramount that you take an informed decision. Make sure that there is no confusion as you must live with it for a long-time.
Here are a few popular myths about home loans that you must be aware of and the truth behind it.
- Home loans with low-interest rate are the best
As a borrower, you may invariably look for a lender that offers home loans at the lowest interest rate, but it may not be practical. Firstly, the lenders determine the interest based on several factors, including age, income, credit repayment history, etc. Secondly, while the low-interest rate may seem like an affordable option, it could mean that there are other charges, and the lender may require paying a higher down payment. Hence, it is better to look for a loan offer with a competitive interest rate and other affordable charges.
- It is better to apply for a loan for a shorter duration.
The home loans are quintessentially long-term financial products. Generally, the duration of a home loan ranges from 15-30 years. Most first-time borrowers assume that if they opt for a short-term loan, they will get the credit at a lower interest rate. But, they don’t realise that short-term loans mean higher EMI, which can significantly impact the monthly budget and make the loan unaffordable.
Thus, while short-term home loans let you repay the debt quickly, they may not necessarily be the best deal. It is better to opt for a mid-term to long-term loan so that the internet rate and EMIs are affordable.
- A low credit score means guaranteed rejection.
All lenders indeed review the credit score of the home loan applicants to determine their eligibility and have a certain minimum credit score requirement. And many loan applicants believe that if their credit score does not meet the lender’s benchmark requirement, their loan will be rejected. The truth is you can get your loan approved even with a low credit score, provided you can convince the lender that you have sufficient financial resources to repay the loan on time.
Also, today many lenders in India offer loans to borrowers with low credit scores, but they may charge a higher interest rate than other lenders.
- Fixed-rate home loans are cheaper than the floating interest rate.
When people apply for home loans online, they can choose between a fixed and floating interest rate. Most first-time buyers opt for a fixed-rate loan considering it to be cheaper. They believe that since the market is unpredictable, it is better to choose a fixed interest rate. The truth is that floating interest rate loans are cheaper than fixed-rate loans, resulting in significant savings in the long-run.
Additionally, even if the interest rates fluctuate, the effects are only short-term, and the interest rate is adjusted within a month or two. So, experts recommend opting for a floating rate loan as it is cheaper in the long-run.
- Lenders charge a penalty for prepaying the loan.
Until a few years ago, the lenders charged a penalty for prepayment of the loan. But, today, it is not valid. The Reserve Bank of India has restricted the lenders from levying prepayment charges on floating rate home loans. Even in case of fixed-rate home loans, the lenders are restricted from collecting prepayment charges after a certain number of years. Thus, if you have the financial resources, you can close the loan account before the actual term without incurring any penalty.
Now that you are aware of the common myths, be wary of them and make an informed borrowing decision.