Having a own home is the dream of every person. As the prices of real estates are increasing day by day, it is not only difficult but also unwise to buy a home only through your savings. Taking a Home Loan is the best choice as it will allow you to repay the loan amount in affordable EMIs. We are living in an era, where getting an information about any loan is not that difficult, but getting the right information is still a challenge. Be careful since every Home Loan scheme comes with its own terms and conditions. You should have knowledge of about even the small clauses, otherwise you will end up losing more than what you achieve. There are several myths associated with home loans, which can make potential buyers take a step back. There are many reasons behind these myths like half-truths, information overload, misinterpretation or misconceptions. Hence, here we bring before you some common myths and corresponding facts related to home loans to make the borrowing process easy and hassle-free.
1. Increase in the Interest Rates Increases EMI:
When the interest rates increases, the first thought which comes to any borrower’s mind is that they have to pay inflated EMIs which will lead to financial problems for them. But this is actually not the case with. Banks usually increase the tenure of your home loan to keep the EMI amount constant and you do not have to pay a huge installment every month, that means you end up paying the same amount as EMI for a relatively long period of time. So that it doesn’t increase the chances of EMI default.
If you don’t want any changes in the loan tenure, inform your bank that you are ok with a higher EMI. Keep in mind that you are actually disturbing your finances by increasing the loan tenure as you will end up paying a lot more in interest. Try to refinance the loan or prepay your loan in parts to reduce your tenure. The Interest rate levied by the lender also depends on other factors like age of the borrower, income of the borrower and his ability to pay inflated EMIs. If you apply for a home loan at a young age and have a good income, the interest rate will be brought down for you by the lender. So, you will not need to worry about high EMIs anymore.
2. Prepayment Always Attracts Penalty Charges:
This is not always true. Typically, pre-payment charges are levied during the 3-5 years of the home loan. Also, the charge goes down over the time. Some banks or lenders may choose to charge it, some may not. It completely depends on the nature of the financial institution or bank.
If you want to repay the loan debt using your personal savings, you will not be affected by such charges. Most financial institutions waive off the penalty for pre-payment unless you have opted for a home loan refinance from another lender. Most lenders allow pre-payments of up to 25% of the outstanding loan amount in one financial year. However, for any amounts paid over the specified limit of 25%, banks might charge 2-4% as pre-payment penalty on the extra pre-payment. It is not always a good idea to pay off your loans early. Home loan gives you many advantages such as income tax and appreciation in value of your property. So take advice from experts before prepaying your home loan.
3. Loan with Lowest Interest Rate is the Best deal:
The cheapest detergent powder is not always a good detergent powder, same in the case of home loan interest rates. Loans with lowest interest rates are the best is the most common of all myths around home loans. At first glance, the rate might look tempting, but there could be a number of strings attached. Interest rates are important, but not the only factor to choose the loan product. The home loan interest rate does not reflect the true cost of your home loan. Annual Percentage Rate or APR reflects the true cost of your loan that includes processing fee, principal amount, stamp duty, interest, tenure, mortgage insurance, file charge and EMI.
Always do a rough check on all the home loan products and schemes offered in the market. Read the fine print carefully and make sure that there are no hidden charges on your home loan. Choose the one that best suits your finances.
4. Fixed Rate Home Loans Are Better Than Floating Rate Home Loans:
This is the biggest among all the Home Loan myths and this is why we advise you to read the fine print carefully. Not only borrowers, but many financial experts believe that a fixed rate on a home loan will fix the interest rate for the entire period of the home loan. A Fixed rate is not in fact fixed for the entire loan tenure and it is generally fixed only for a specific loan tenure which is usually 3-5 years. After which it automatically becomes a Floating Rate Loan.
5. Shifting Home Loan to another Bank require repaying from scratch:
Many home loan borrowers have this misinterpretation in their mind where they believe that they have to repay the loan from the scratch if they choose to shift loan from one bank to another. When you transfer your loan, the new bank does not repay full amount and start from scratch. In fact, it prepares a new amortization chart, depending on your new interest rate and schedule EMI accordingly. There is a sheet called “home loan amortization schedule” which creates a breakup of your principal and interest paid from your each EMI. The new lender would seek your principal amount which is remaining to be paid and would calculate EMI on that basis, which must be equal if you take the same remaining number of months which you had with your previous bank.
A home loan fills the gap between the dream of buying your house and finally owning your dream-house. It is a long-term commitment and one of the most important decision in life so don’t get trapped by the above myths, assess all the aspects of it before making a final decision. Compare multiple home loan products and choose the one that suits you the best.