Some Common Misconceptions About Home Loans — Know the Truth!
Getting a Home Loan to purchase a residential property has become a necessity in the present times. Even though the general income level of the people is also increasing, but the prices of residential properties also have increased manifolds in the last few years. This has left prospective home buyers with no other option but to avail a Home Loan to realise their dream of owning a property.
About Home Loans
Home Loan is a secured loan that is offered by various financial institutions operating in the Indian market. The property acquired with a Home Loan must be mortgaged with the lender while you can continue to live in the property and use it for residential purpose only. As the amounts availed as a Home Loan can run into many lakhs and sometimes into crores, the maximum repayment tenure that can be availed is up to 30 years to make the EMIs (Equated Monthly Instalment) more affordable. The rate of interest against Home Loan starts from 8.45% and varies slightly according to the lender. The amount availed as a Home Loan must be used for residential purpose only.
With the rising use of technology in the financial services sector, you can now Apply for a Home Loan through Online channels such as the website of the financial institution or online finance marketplaces such as MyMoneyMantra. Here you can easily compare different Home Loan offers, check the interest rates, repayment tenure, Home Loan documents, EMI calculator and other terms and conditions, that will assist you in making an informed decision.
Common misconceptions about Home Loans
Due to numerous information sources present and sometimes false advertising by some agents, there are a few misconceptions regarding Home Loans in the mind of prospective home buyers. Here are some of the most common misconceptions about Home Loans that you must be aware of:
- The fixed interest rate is better than floating
If you are thinking that fixed interest rates are better than floating interest rates, then you need to understand that flexible interest rates allow you to avail the benefits of reduction in Home Loan interest rates. Similarly, if there is an increase in base rate by the Reserve Bank of India (RBI), your EMI will increase due to higher interest component. Even with the fixed interest rates nowadays, they are fixed only for a period; thereafter the lenders are free to alter them as well. In such a scenario, availing a floating interest rate Home Loan makes more sense.
- It is a wise decision to go for a shorter tenor with higher EMI
The conventional wisdom says that you must try and repay your loan at the earliest in order to save on the interest cost. This is entirely true if your financial position allows you this luxury, then you must avail it. There is one downside to it though if you try to go for a shorter tenure, your EMI liabilities are going to be significant and, in some cases, might need you to stretch your finances. Always opt for a tenor with an EMI which you can afford. Whenever you have additional cash, you can use it to repay or foreclose the loan without any foreclosure charges.
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- It is not advisable to go for refinancing
It is correct that if only 3–4 years of the repayment tenure are remaining, you should not go for refinancing as the cost involved will outweigh the benefits to be availed. Though, if it has only been a few years since the repayment has started and another lender is offering you significantly lower interest rates (more than 1%) then going for refinancing is a wise decision as you would save a significant amount of money on interest costs and also have a lower EMI burden.
- The interest rate should be the only consideration
The interest rate is indeed an essential component of a Home Loan, but there are other factors that you should also consider while availing a Home Loan. The service provided by the lender, additional benefits offered, financial charges, and so on should also be taken into consideration. You should compare the Annual Percentage Rates (APRs) as they provide you with a better estimate of the cost of the loan as compared to interest rates.
- Lenders levy significant foreclosure charges
This used to be correct till a few years ago, but since 2012 as per directions of RBI, banks cannot charge you any foreclosure charges on Home Loans. So, if you have a sudden influx of cash, use it to repay your loan on a priority basis.
- Increase in interest rates will lead to a corresponding increase in EMIs
If there is an increase in the interest rates, your lender will offer you an option to increase the repayment tenure to make the EMIs more affordable or keep the same tenor and service a higher EMI. You can choose the option which suits your financial situation the best.
Availing a Home Loan is a significant financial decision of your life as you would be serving a large part of your monthly income towards the EMI payments for most of your working life. Therefore, you should do extensive research and negotiations before taking a final decision.
Also Read: Home Loan Process Explained!
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