When you want to buy a house, but are short of money, taking a loan from a credible financial institution can help you achieve your goal. There are many myths about home loans, which must be wary of to make the most of your loan.
Educating yourself about housing loans and the various features offered by lenders is essential. You find a sea of information online about housing loans, but some of these may be outdated facts or incorrect. Therefore, it is better to do your research and not fall prey to such wrong information.
Here are some of the common myths about housing loans
- Lower Interest Rates are Always Better: The competitive loan market means that there is a bevy of lenders trying to attract customers with low interest rates. However, choosing a bank based only on interest rates might not be a good idea. Look at the flexible repayment options and other associated charges that you may have to incur in the future to choose the loan right for you. Also, understand clearly the type of interest being charged and how is it calculated.
- There is a Penalty on Prepayment: RBI stipulates that lenders cannot charge a penalty for prepayment in floating rate loans. So, if you have surplus funds, you can use it to pay off at least part of the principal. This can help reduce the loan tenure or your monthly EMI burden.
- Low EMI Option Is the Way to Go: A low EMI option will work for you if you don’t have much money to spare. The accompanying interest, though, may be higher as the tenure increases. Alternatively, a high EMI can help you pay off the loan in a shorter time. This option will be suitable if you have excess money every month that you can put towards your EMI.
- Approval of Loan Confirms the Legitimacy of the Documents: Many believe that a bank providing a loan proves the authenticity of the property documents. Although the banks take measures to check the validity of documents, it can no way be held responsible if they are later found to be fraudulent. Therefore, verify your property in the corresponding government offices to ensure your peace of mind.
- No Loans for People with Poor Credit Score: A low credit score can indeed affect your chances of availing a loan. The banks, though, decide loan approval based on many other factors as well including your
○ Monthly income
○ Age
○ Designation in your profession
○ Debt to Income ratio
Adding a co-applicant with a higher credit score can enhance your chances of loan eligibility. Requesting someone with a good credit score to act as your guarantor can also improve your chances of getting a loan.
- Floating Rates Are Less Beneficial Than Fixed Rates: The interest rate of the fixed rate loans in most institutions is not the same over the entire loan tenure. It is set only for a short period after which it can be converted into floating rate plans.
According to recent RBI guidelines, the floating interest rates need to be reviewed based on marginal cost of funds
This means that if the market falls, the banks can promptly implement the transmission of benefits to the consumers with a home loan. In such a case, the floating interest rate can be much lesser than the fixed interest rate, which remains unchanged. If the market prices rise, however, a fixed rate loan can turn out to be more beneficial.
Analysing the information available to you from different sources about loan taken to buy a house can help you discern the facts from myths. Identifying trusted websites and magazines can also guarantee that inaccurate data never mislead you.