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Busting Four Common Myths Around Home Loans

Busting Four Common Myths Around Home Loans

Busting Four Common Myths Around Home Loans
(Flickr)

With banks offering several unique products at competitive interest rates, choosing the right home loan plan can be a little difficult. Without proper understanding of the many clauses involved in a product, you may have misconceptions about home loans.

MakaanIQ busts four of the most common myths around home loans:

Myth 1: Take the shortest re-payment tenure to close the loan soon

Most borrowers opt for the shortest re-payment tenure to avoid any ripple effects of any increase in the repo rate by the Reserve Bank of India. What they forget is that the shortest tenure also means higher equated monthly instalments (EMIs). High EMIs could lead to liquidity issues if you don't plan your budget properly. Over-commitment can lead to long-term repercussions like EMI default. Also, if you approach your lender later to increase the tenure, you may have to bear a cost for it.

Our tip: Try to save some money as you pay your EMIs and invest it in options that yield profit of at least 12 to 15 per cent. This will generate greater income than the 10.5-11.5 per cent that you will pay as interest on your loan. You could use this gain to pre-pay your home loan.

Myth 2: Loans with lowest interest rates are the best

It is the most common of all myths around home loans. What may seem to be the lowest interest rate initially may actually cost you more, if you have to pay charges like technical/ legal valuation fee, prepayment penalty and processing fee. Scrutinise the loan documents to find out about the hidden costs.

Our tip: Always do a rough check on all the home loan schemes and products offered in the market. Choose the one that best suits your finances.

Myth 3: Interest rate increase amounts to escalated EMIs

Banks generally extend the repayment period of your home loan to keep the EMI amount constant, in case there is a change in the interest rate. In simple terms, you end up paying the same amount as EMI for a comparatively long period of time.

Our tip: If you don't want any changes in the loan tenure, inform your bank that you are fine with a higher EMI. Also, try using an online home loan calculator to assess how your repayment will progress over the extended tenure. It might suit your budget and finances.

Myth 4: Fixed interest rates are better than floating

Don't get influenced by the word 'fixed' when it comes to interest rates. The truth is, lenders keep the repayment charge unchanged under the fixed interest rate option only till an agreed period, not for the entire period of the loan. The home loan agreement is actually subject to re-setting and the money market clause.

Our tip: As a borrower, you must examine and scrutinise your requirements and compare various parameters before arriving at a decision on what type of loan interest to go for. For instance, if security is the criterion, a fixed-rate option works better.

To know more about fixed and floating-rate home loans, click here.

Last Updated: Sat Jun 18 2016

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