A well-managed loan takes us closer to our dreams; and it goes without saying, buying a new home is one of the biggest dreams of the lifetime! A home loan aids the process of realizing such a significant goal, by backing our finances. Even if you have the funds to buy a home without availing a loan, it is not a good idea to exhaust all your savings to purchase a property. Besides, aspiring home-owners can benefit immensely from this financing facility- it is one of the cheapest borrowing tools with a low rate of interest. Unlike other loans, it promises zero prepayment penalties along with floating interest rates.
We have seen property prices boom over the last few years, and how! No wonder, buying a home entails highly alluring capital appreciation. With rents also keeping up with inflation seemingly, making a home is one of the few investments you can protect from inflation in the long run. Till about a few years ago, it was unthinkable for most people to invest in a house in their twenties or early thirties, but in today’s age and times, more and more youngsters are aspiring to buy their own house at an easily stage of their life, thanks to rising income levels and increasing ambitions. Even PMAY ( Pradhan Mantri Awas Yojana) is intended towards the same goal. Tax benefit is yet another key advantage of getting a home loan. You will get this benefit not only on the repayment of the principal amount, but also on the basis of interest payment. However, before you take the plunge note that borrowers are often misled by various myths and misconceptions about home loans; the following are some of the major home loan myths that you should steer clear of:
1. Shorter tenure is good: It’s true that shorter home loan tenure will always come with a lower interest cost than a loan with a longer tenure, given that their interest rates are equal. However, you should also be aware that shorter loan tenures attract higher EMI vis-à-vis loan with longer tenure. This will not bode well for your financial health as it will limit the scope for investing ahead for meeting other vital financial objectives. Opting for an aggressive tenure of repayment minus a sufficient buffer may lead to defaults on your EMIs during emergencies down the line. This in turn, might have an adverse long-term impact on your credit score and your future loan eligibility.
2. Lowest interest is the best option: When it comes to choosing a lender, definitely, the home loan interest rate is one of the foremost criteria, but other major factors should also not be overlooked, such as LTV (loan-to-value) ratio, processing fee, loan tenure, etc. for example, a bank or a financial institution offering low interest rate may require you to settle for a lower LTV ratio, which implies you will have to shell out a higher down payment. Likewise, lenders offering low interest rates may charge a higher processing fee and other home loan hidden facts or charges. Hence, it is advisable to adopt a holistic approach while comparing various loan offers instead of only focusing on the interest rate.
3. Good credit score ensures loan approval: As far as evaluating your creditworthiness is concerned, there are other factors beyond just a good credit score. These include monthly income, age, stability of your job, EMI outgo currently and the property title along with the location among other factors. All these factors are of crucial importance when assessing the credit profile of a loan applicant. Your home loan application may be rejected if you fail to meet any of these criteria.
4. Fixed interest rate is better than floating: With a steady decrease in home loan interest rate in recent times, many home loan applicants are more inclined towards fixed-rate home loans as that will allow them to bypass volatility in terms of interest rates. Yet, few lenders will provide loans at fixed rates for the whole duration. Those who offer the same, mostly end up charging a higher rate of interest for lowering risk levels. Most lenders generally offer mixed rate products where the rates will remain the same for a pre-fixed time period, for instance the very first 2/3/5 years of the loan period. Once that period is over, floating rates are applicable. Also, note that the rate of interest chargeable during any fixed rate period will naturally be more than the floating rate home loan interest rates at the time of loan sanction. You can take the help of a home loan EMI calculator to get an exact idea.
5. Direct loan application is better: You might end up reaching out to multiple lenders to hunt for the best loan rates and other features. However, every time you make a direct loan application, the lender gets in touch with the credit bureaus to fetch your credit report and assess your creditworthiness. This kind of lender-initiated enquiry is considered as a hard enquiry and this will bring down your credit score step by step, multiple times, which consequently hampers your loan eligibility. Instead, it is advisable to visit online marketplaces for comparing multiple home loan offerings based on parameters like your own income every month, credit score, your job profile and more. Though these marketplaces will fetch your credit score too, it is considered to be a soft enquiry, and thus, will not affect your credit score in any way.
6. Home loan authenticates the title of your property: You should remember that a home loan is mostly associated with the financing of the property and does not have anything to do with the title of the property. As a buyer, you are completely responsible for verifying the same before availing a home loan.
On a closing note
Thus, before you sign the dotted line, or even initiate the process, make sure you are acquainted with how these loans work, in order to avoid any nasty surprises later on. After all, it is often an once-in-a-lifetime decision that can have long-term consequences on our finances. Make sure you do your research well, park your additional funds, spend a little conservatively during the loan tenure, read the documents thoroughly, to make a well-informed choice and not fall a victim to the myths about loans. Of course banks are at your disposal to make your dreams come true, offering easy monthly instalments and the option to choose the repayment tenure according to your convenience. If you are short of cash, or not keen to liquidate your savings, a home loan is an unbeatable form of financial assistance.