Blogs

20 Home Loan Myths That Really Need To Be Cleared Up

///
Comments3

You live in an information age so getting information for any loan especially for a home loan is not difficult for you but getting the right information is still a challenge and this post will bust the 20 home loan myths that many people believe. There are many reasons behind these myths like information overload, half-truths, misconceptions or misinterpretation. Here are 20 myths about home loans –

home

  1. Choosing lower interest rate is better: Don’t let the big shiny advertisements of “Home Loan at the Lowest Interest Rates ” fool you. The home loan interest rate does not reflect the true cost of your home loan. APR (Annual Percentage Rate) reflects the true cost of your loan that includes principal amount, interest, tenure, processing fee, file charge, stamp duty, mortgage insurance and EMI.
  2. Fixed interest rate will remain fixed for the entire tenure: Not only borrowers but many finance experts believe that a fixed rate on a home loan will fix the interest rate for the entire tenure of the home loan. Truth be told, the fixed interest rate is fixed only for a specific period (often 3 to 5 years), not for the entire period of the loan.
  3. Fixed interest rate is better than floating interest rate (or vice versa): Both have their own pros and cons and neither one is better than other. If you need certainty about future cash outflows then you may choose fixed interest rate or if you want to take advantage of fluctuations in interest rates then you may go for floating or variable interest rate for your home loan.
  4. Big banks offer lower interest rates: Big banks are always not the best source for you to get the best home loan deal. NBFCs and other small banks may give you the cheaper interest rate for your home loan. Apart from the interest rate if you need higher loan amount then NBFCs and other licensed lenders would be better than big banks.
  5. All banks offer same interest rate: It is your lack of research if you think that all banks are offering the same interest rate for a home loan. If few big banks offer the same interest rate on a home loan – still you can find a huge difference between their processing fee and other charges.
  6. Government or central banks like RBI or Fed decides the interest rate of home loan: RBI, Fed or the government is not directly related to your home loan interest rate. Each bank or NBFC has its own home loan rate based on their average cost of fund.
  7. Applying directly to banks or NBFCs is a smart thing: Exploring various options is always smarter than applying to one bank only. Applying through online marketplaces like Namaste Credit would be better than applying directly without exploring. This will not only save your time and money but also help you to get the best deal and free expert advice.
  8. Choosing your current bank is a smart thing: Explore before you choose and analyse before you decide is the only mantra for smart borrowers. This mantra will help you to choose lower interest rates,lower fees, and better loan features.
  9. People with higher income will get higher loan amount: DTI (Debt-to-Income Ratio) and valuation of your property or construction cost determine your loan amount. DTI (Debt-to-Income Ratio)in simple words is a figure that determines what you can afford to pay each month.
  10. DSA, Brokers or online marketplaces charge an extra fee: No reputed broker, DSA, consultant, agent or online marketplaces charge any fee to borrowers or customers they get their fee from lenders. Here I would suggest you applying with Namaste Credit (the India’s best and first online marketplace for home and business loans) would be great that charges zero fees for its world class services.
  11. Banks don’t negotiate the fee and other charges: Generally borrowers focus on negotiating interest rate only to get the best home loan deal. You can negotiate every kind of fee with banks or lenders including processing fee, stamp duty, franking fee, file charge and service charge.
  12.  Banks or NBFCs charge a penalty on prepayment or foreclosure fee: If you are in India then you need to worry about prepayment penalty or foreclosure charge of your home loan. As per RBI guidelines, no bank or NBFC can charge any foreclosure fee or prepayment penalty on a home loan.
  13. Healthy CIBIL score guarantees home loan approval: This is the biggest misconception that your good CIBIL score is enough for home loan sanction. CIBIL is only one criterion to approve your home loan. Lenders may reject your home loan application despite good CIBIL score if your name is in defaulter list, if the co-applicant’s CIBIL score is poor or if you don’t have adequate repayment history etc.
  14. Poor credit score means no home loan: It is good to have a good credit score but a bad credit score does not kill your chances of obtaining a home loan. Traditional banks may reject your home loan application but still you can get the loan from NBFCs or alternative lenders on a bit higher interest rates.
  15. Pre-Qualified offers are equal to home loan sanction: Pre-Qualified, pre-approval, instant approval or pre-approved offers do not guarantee your home loan. Before sanctioning your home loan all lenders will evaluate and assess all your documents including your credit score. So these offers are nothing more than guesswork.
  16. All home loans are the same: There is a host of home loan products available in the market to suit your needs. So choose a home loan that fits your needs.
  17. Life insurance of property owner or home loan protection plan is mandatory: Some lenders try to sell you their life insurance policies or home loan protection plans to home loan buyers. This is called misselling and you need not buy any kind of home loan protection plan or life insurance policy to get a home loan.
  18. Property insurance is mandatory: Property insurance is not compulsory while taking a home loan, however,few companies can make it mandatory in their terms and conditions. Generally, it is optional to ensure your home or property while getting a home loan.
  19. Prepay your home loan if you can: It’s not always smart to pay off your loans early. Home loan gives you many benefits including income tax and appreciation in value of your property. So consult with experts before prepaying your home loan.
  20. Refinancing is expensive: Feel free to refinance or transfer your existing home loan if you are looking for lower EMI, higher loan amount or better interest rates as RBI has abolished the exit fee, prepayment penalty, and foreclosure charges.                                                                                                                                                                                              Home Loan is a long-term commitment so don’t get trapped by the above myths and choose an appropriate home loan product after due diligence.What are the other home loan myths that most people believe?

3 Responses

  1. Nilesh

    Hi Lalit,

    This is awesome and very informative – I have a home loan with GIC housing Finance ltd (Pune – Maharashtra branch – Shivaji Nagar)effective 11/12/2012 onwards – Loan amount including insurance was – 1556000 INR with a interest rate of 11.25%. I have been paying EMI of 16638 INR since last 4 + year. last EMI was withdrawn effective 10/11/2016. Its very sad to see that the outstanding balance is still 1448000 INR during this tenure with GIC – I have a clean payment history. Now I wish to lower my burden and wanted to switch to SBI or HDFC as they offering me interest rate of 9.10% . I have all the required documentation ready for the process. However GIC housing finance ltd has demanded 2% foreclosure fee on the outstanding balance – which is a total sum of 29000 INR. As per the above description given – RBI has abolished any foreclosure fee If the consumer wanted to switch bank for lower ROI. When ask for reason they stated that its mandate for me to pay this – Request for your help and guidance in this issue . You may email me your reply on *********** contact # *********
    Additionally I have a co-applicant as my mother – Pune, Maharashtra – 411060

  2. You make a really great point about knowing exactly what you need to pay for at different banks, even if they offer the same interest rate. I’m the kind of person to not notice the little details like processing fees, so I’ll have to keep my eye out for those. It might be a good idea for me to bring a friend to look over different deals with me. Then we can know exactly what we’d have to pay for every home loan option.

Leave a Reply