Myth vs. Facts: 4 Home Loan Myths Busted

Myths exist in every sphere, and home loans are no different. Helping you accomplish one of your most cherished dreams, it is all the more important to bust these myths to make sure you leverage the maximum utility out of this offering and don’t end up overstretching your finances.

Read on to know some of the most common myths associated with home loans and their reality.

Myth 1: You can get a home loan only if you have a high credit score

Fact: No, it is not. While it is true that a high credit score eases the home loan application process, you can avail a Home Loan even if your credit score is a little lower than desired. It will, however, carry a high rate of interest. Hence, before applying for a home loan, you must check your credit score and get it in order if it’s not up to the mark.

However, if you end up availing a home loan at a high rate of interest due to a poor credit score, cut non-necessary expenses while servicing the loan to make sure the EMIs do not get affected. Take stock of your finances and put such costs on the backburner.

Consider the opportunity as a blessing in disguise to rectify your credit score by reducing discretionary expenses and paying EMIs on time. On the other hand, if you can’t afford to opt for a home loan at a high rate of interest, get your credit score in order before applying. Pay existing debts on time, including credit card dues, and keep your debt-to-income ratio low.

Myth 2: Shorter the loan tenure, the better it is

Fact: While everyone desires to be debt-free as early as possible, it is not wise to do so by putting yourself under unnecessary burden. A short Home Loan tenure reduces the interest outgo, but significantly enhances the EMI amount (see table below).

An increase in the loan tenure by 5 years reduces your monthly EMIs by approximately INR 20,000. Take stock of your current liabilities, including non-negotiable ones such as children’s higher education, insurance premiums, retirement, etc., and choose a home loan tenure accordingly.

As home loan is a long-term commitment, plan your finances in a manner so that there are no hiccups midway. If you are not comfortable with a short tenure, opt for a long one. Apart from reduction in EMIs, a longer tenure allows for better eligibility.

Myth 3: Home Loan with a low rate of interest is always the best

Fact: Though it is true that rate of interest is one of the crucial factors to look for while applying for a Home Loan, it is not the only criteria. Or rather, it should not be the only judging factor. Home loan with the lowest rate of interest doesn't need to be the best. A home loan with a low rate of interest may entail a higher down payment.

Apart from the home loan rate of interest, you need to look at other parameters like:

• The lender’s reputation

• Value-added services like parallel funding

• Home loan disbursement process

• Customer service

These things may look small but matter a lot. For instance, you can break the down payment into smaller amounts with parallel funding. This comes in handy when you are facing a cash crunch. It relieves you of the burden of paying a lump sum amount upfront at one go. It helps you better manage your finances during down payment.

Myth 4: Home loan prepayment attracts a penalty

Fact: Home Loan prepayment allows you to pay your home loan (in part or full) before its tenure. While lenders did levy a penalty on home loan prepayment earlier, the case is different now. If you have availed a home loan on a floating rate of interest, you are not liable to pay a penalty.

So, if you have received windfalls in the form of a bonus or maturity of an insurance policy, you can direct a certain percentage of the proceeds to home loan prepayment. Home loan prepayment brings down the outstanding amount and helps you save on interest outgo. This allows you to save and invest towards prepayment.

In other words, you can tailor your finances so that you can make periodic prepayments to close your Home Loan before its tenure and be debt-free. Prepayment allows you to make specific investments and channelize your money into avenues that help you accumulate funds.

In Conclusion

Lastly, read the fine print before signing the loan documents. Understand the clauses well to avoid surprises later. Get in touch with your lender if you are unable to comprehend any term or statement and adopt due diligence before moving forward.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
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