6 Myths About Home Loan

Like every other financial commodity, several theories and misinformation are circling home loans. Home loan borrowers often fall victim to these misconceptions and end up making the wrong choices in the collection of loan options. Here's a list of the most common home loan misconceptions you ought to be aware of.

Shorter tenure good

Shorter home loan tenure would still have lower borrowing payments than longer-term loans, given that their interest rates are comparable. However, shorter lending terms will also draw higher EMI over longer-term loans.

This will affect your financial wellbeing if you're left with no space to spend on other main financial priorities. Such aggressive repayments without an inadequate contingency will even lead you to default on EMIs in the case of financial emergencies. This could have long-term negative implications for your credit report and your potential eligibility for the loan.

You can easily check on home loan EMI calculator.

• Lowest interest rate
  
  
  Home Loan Interest Rate is only one of the considerations to weigh when finding a lender. Such relevant considerations include the LTV (loan-to-value) ratio, payment costs, and the length of the loan.
  
  
  For example, a lender extending the lowest interest rate will enable you to apply for a lower LTV ratio, which means that you may need to use higher down payment capital. 
  
  
  Few lenders often charge borrowers at a reduced interest rate on long-term loans. Similarly, lenders providing the lowest interest rate can charge you higher transaction fees and extra charges. Therefore, take a more systematic approach when contrasting multiple loan deals instead of limiting them to interest rates.
  
  
• A good credit score guarantees loan approval
  
  
  A credit score is one of the variables used to determine the creditworthiness of a loan borrower. Other main considerations include your age, monthly salary, employer profile, career security, current EMI responsibilities, location, property title, etc. Each of these plays a key role in determining your credit profile. Failure to meet all of these conditions would result in your application for a home loan being denied.
  
  
• Penalty for prepayment
  
  
  Reserve Bank of India has forbidden banks, NBFCs, and HFCs from penalizing pre-payment or foreclosure of floating-rate loans. Without incurring any prepayment fees, this has made all floating rate home loan borrowers able to make pre-payment or foreclose loans. Even in the case of fixed-rate mortgage loans, often lenders do not charge prepayment fees as they are made from the borrower's pool of funds.
  
  
• Fixed better than floating
  
  
  With home loan interest rates showing a slow decline over the last year, many home loan borrowers perceive fixed-rate home loans to be a safer choice to resolve interest rate fluctuations. However, relatively few lenders provide fixed-rate home loans for the entire tenure.
  
  
  Those that do, typically charge higher interest rates on fixed-rate mortgage loans to reduce their own interest rate risk. What most lenders typically sell are mixed rate home loans whose rates remain set for a pre-determined duration, say for the first 2, 3, or 5 years of the loan period. 
  
  
  After the end of that time, the floating rates will become valid. Even the interest rate paid during the fixed-rate period is higher than the floating-rate interest rate on home loans at the time of the loan penalty. 
  
  
• Direct loan application better
  
  
  Many home loan borrowers go out to several lenders to shop for the right loan rates and other features. However, any time you apply for a direct loan from a bank like Oriental Bank home Loan or an HFC, the lender can contact the credit bureaus to get your credit score back and determine your creditworthiness. Such lender-initiated inquiry is called a hard investigation, and each of them will reduce the credit score by a few points. Multiple loan applicants will reduce your credit score a number of times, which may negatively affect your credit eligibility. Instead, visit the online finance platform to compare the different home loan options available on your credit score, monthly salary, work history, and other eligibility criteria. Although these markets, too, would get your credit score, it is called a soft survey and thus will not have an effect on your credit score.

Also read:- Home loan myths