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Home loans: 6 popular myths to be aware of

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Applicants often fall prey to misconceptions and end up making wrong choices while selecting loan options

Just like any other financial product, there are numerous myths and misconceptions circling around home loans. Home loan applicants often fall prey to these myths and end up making wrong choices while selecting loan options. Here is list of the most prevalent home loans myths that you need to be aware of.

Shorter tenure good

Shorter home loan tenure will always have lower interest cost than longer tenure loan, assuming that their interest rates are equal. However, shorter loan tenures would also attract higher EMI vis-a-vis loan with longer tenure.

This can have negative impact on your financial health if it leaves you with little room to invest for other crucial financial goals. Such aggressive repayment tenures without insufficient buffer can also cause you to default on EMIs during financial emergencies. This might have long-term negative consequences on your credit score and your future loan eligibility.

Lowest interest rate

Home loan interest rate is just one of the several factors to be considered while choosing a lender. The other important factors include LTV (loan-to-value) ratio, processing fee and loan tenure.

For example, a lender extending lowest interest rate may require you to opt for a lower LTV ratio, which means that you will need to put in higher down payment money.

Some lenders also charge lower interest rate for borrowers availing loans for longer tenure. Similarly, lenders offering lowest interest rate may charge you higher processing fee and other charges. Hence, take a more holistic view while comparing various loan offers instead of limiting it to interest rates.

Good credit score guarantees loan approval

Credit score is one of the several factors used for evaluating loan applicant’s creditworthiness. Other major factors include your age, monthly income, employer profile, job stability, existing EMI commitments, location, property title, etc. Each of these play a crucial role in assessing your credit profile. Failure to meet any of these criterion will lead to rejection of your home loan application.

Penalty for prepayment

The Reserve Bank of India has barred banks, NBFCs and HFCs from penalising pre-payment or foreclosure of floating rate loans. This has made all floating rate home loan borrowers free to make pre-payment or foreclose loans without incurring any prepayment penalties. Even in case of fixed rate home loans, many lenders do not charge prepayment charges if it is made from the borrower’s own source of funds.

Fixed better than floating

With home loan interest rates recording consistent decline over the last one year, many home loan applicants consider fixed-rate home loans to be a better option to do away with interest rate volatility. However, very few lenders offer fixed rate home loans for the entire tenure.

Those who do, usually charge higher interest rate for fixed rate home loans to reduce their own interest rate risk. What most lenders usually offer are mixed rate home loans whose rates remain fixed for a pre-specified period, say for the first 2, 3 or 5 years of the loan tenure.

After the end of that period, floating rates become applicable. Even the interest rate charged during fixed rate period is higher than interest rate for floating rate home loans at the time of loan sanction.

Direct loan application better

Most home loan applicants reach out to multiple lenders to shop for best loan rates and other features. However, every time one makes direct loan application with a bank or an HFC, the lender will contact credit bureaus to fetch your credit report and evaluate your creditworthiness. Such lender-initiated enquiry is considered as hard enquiry and each of them will reduce your credit score by a few points. Multiple loan applications will reduce your credit score multiple times, which might adversely impact your loan eligibility. Instead, visit online financial marketplace to compare various home loan offers available on your credit score, monthly income, job profile and other eligibility parameters. While these marketplaces, too, will fetch your credit score, it is considered as soft enquiry and hence, would not impact your credit score.

(The author is head of home loans, Paisabazaar.com)

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Printable version | Jan 27, 2020 5:26:01 AM | https://www.thehindu.com/business/beware-these-home-loan-myths/article30480859.ece

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