With the rising personal incomes, people working in MNC outside their hometown and living in metros are looking for home loan to buy homes so that they can save out of rentals which they have to pay every month. Normally a 2 BHK flat in metros like Mumbai cost you around Rs 15,000 per month for rentals and might be around Rs 12,000 in Gurgaon on the lower side.
That opens up the gates for individuals to think about buying home and funding it by home loan in India. Many people in India doesn’t know the impact of managing home loan is on the household finances looking at the increased living expenses of most of the families.
In such a situation, it would be much better to understand the various aspects of home loan and knowing how to manage it in a way which helps you to :-
- Manage mutual fund SIP after paying home loan EMI
- Spend on household chores without any problem
- Maintain sufficient contingency fund
- Manage short term goals like buying car and short holiday tours
Let’s study some of these home loan misconceptions which Indian investors have in their brain:
1.Choose Short Time Period to close Home Loan Account Earliest
Like the stock market prices go up and down and you are never sure about your stock price, likewise your home loan interest rate keeps on fluctuating. This is precisely the reason why most investors try to choose the shortest possible time period for home loan in India to avoid fluctuations in the interest rates due to increase in CRR and Repo rates by RBI.
This is precisely the reason which these people face liquidity issues in their personal bank accounts and they are unable to save money side by side and pay off home loan before maturity without any home loan prepayment charges. When they invest outside (I mean apart from paying home loan EMI), they should expect returns of atleast 12-15% per annum which is normally more than 10.5-11% interest you are paying on home loan.
So conclusion over here is you should be able to save more and pay off your home loan debt early if you invest some money outside rather than increasing EMIs by reducing your tenure for home loan. Loans are usually only interest-only for a set period of time, after which you will either need to increase your repayments to start reducing the principal, or repay the loan in full.
2. Increase in Interest Rates directly means Increased EMIs
When the govt raises interest rates, the first thought which comes to any investor brain is that they have to pay inflated EMIs. But this is actually not the case with. As a general rule, with the rise in the interest rates, banks normally increase the tenure of the home loan and keeping EMI amount intact so that it doesn’t increase the chances of EMI default and thus increasing NPA level for banks.
But this decision also depends upon the age, current income of the borrower and his ability to pay inflated EMIs. In the interest rate cycle, the interest rates go up and then it comes down and EMI comes near to the same level after some years. You have to inform your bank in case you wish to increase your EMI, not your tenure
3. Lowest Rate Home Loan is the best deal
Lower interest rate means lower EMIs for the same home loan tenure. But that hold true only when you are eligible to get home loan from the financial institution where home loan interest rate is lower. In such a situation, the home loan borrower must study the other important factors like home loan initial processing fee, home loan processing time and the quality of service by its employees.
Generally private sector banks serve better because they have certain level of commitment towards their job.
4. Shifting Home Loan to another Bank require repaying from scratch
A lot of home loan investors have this misconception in their brain where they believe that they have to repay the loan from the scratch if they choose to switch one bank to another. There is one sheet called “home loan amortization schedule” which creates a break up of your principal and interest paid from your each EMI.
The new bank would seek your remaining principal amount which is yet to be paid and he would calculate EMI on that basis which should be equal (may be 1-2% different) if we take same remaining number of months which we had with our previous bank.
Also read Home Loan Repayment Schedule
FAQs
With their changing interest rates, adjustable-rate mortgages (ARMs) are a particularly risky choice for borrowers with less-than-ideal financial situations. In fact, some fixed-rate mortgages can also be problematic under the wrong circ*mstances.
What were the biggest issues for a buyer with non traditional mortgages? ›
Cons
- Potentially high interest rates: Not all nontraditional loans have high interest rates by default necessarily, but many of them are ARMs and have the potential to increase your rate at any time. ...
- Greater risk of defaulting: While flexible payment options can be very useful, they can also be dangerous to borrowers.
Conventional loan
Conventional loans, the most popular type of mortgage, come in two flavors: conforming and non-conforming. Conforming loans: A conforming loan “conforms” to a set of Federal Housing Finance Agency (FHFA) standards, including guidelines around credit, debt and loan size.
What is the downside of getting a mortgage? ›
One significant disadvantage of taking out a mortgage is the long-term financial commitment involved. Depending on the length of your mortgage term, you may be making monthly payments for decades, tying up a significant portion of your income.
What is the hardest home loan to get? ›
Conventional loans are traditionally tougher to obtain than government-backed mortgages, and that's still pretty much the case today. Conventional lenders are generally looking for a credit score of at least 740, which is higher than the typical minimum score required for government-backed loans.
How is a $50,000 home equity loan different from a $50,000 home equity line of credit? ›
While a HELOC works like a credit card — giving you a maximum amount you can borrow with a variable interest rate — a home equity loan works more like your mortgage. You get a lump sum of money, and you repay it on a set schedule with a fixed interest rate.
Why avoid alternative lenders? ›
However, alternative lenders provide small loans with higher interest rates, which may not be a good long-term funding option as your business matures.
What are at least 3 things that are prohibited as practices in the mortgage lending markets? ›
Legal Protections
The ECOA makes it illegal for lenders to impose higher interest rates or fees based on a person's race, color, religion, sex, age, marital status or national origin. The Home Ownership and Equity Protection Act (HOEPA) also protects consumers from exorbitant interest rates.
Why is getting a mortgage so complicated? ›
Making sure you stay on top of your credit and are in a good financial position are two easy ways to be approved for a loan. Why is it so hard to get a mortgage today? Because of the home prices and high-interest rates, they are pushing up monthly payments, making it harder for buyers to get a mortgage to start.
What is the easiest home loan to get? ›
FHA loan: 500 credit score
You can qualify for an FHA loan with a low credit score of 500 and a 10% down payment, or 3.5% down if your FICO is 580 or above. FHA loans accept applicants with credit scores as low as 500. Applicants with scores between 500 and 579 need a 10% down payment.
Government-backed loan options, such as FHA, USDA and VA loans, are typically the easiest type of mortgage to get because they may have lower down payment and credit score requirements compared to conventional mortgage loans.
What do most borrowers use when purchasing a house? ›
Conventional Mortgages
Conventional mortgages are the most common type of mortgage. That said, conventional loans may have different requirements for a borrower's minimum credit score and debt-to-income ratio (DTI) than other loan options.
Is it smart to always have a mortgage? ›
If it's expensive debt (that is, with a high interest rate) and you already have some liquid assets like an emergency fund, then pay it off. If it's cheap debt (a low interest rate) and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
Is paying your mortgage faster a good idea? ›
It might make sense, for example, to put the money into paying off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands of dollars in interest over time, plus help you build equity in your home faster.
How long does it typically take to pay off a mortgage? ›
The average mortgage term is 30 years, but that doesn't mean you have to get a 30-year loan – or take 30 years to pay it off. While it offers a relatively low monthly payment, you'll likely pay the most in total interest if you keep the loan for 30 years.
Which type of loan is riskier for the borrower? ›
Unsecured loans are riskier than secured loans for lenders, so they require higher credit scores for approval. Credit cards, student loans, and personal loans are examples of unsecured loans.
What is the riskiest type of loan? ›
Types of high-risk loans
Secured loans: These loans require you to put up an asset, such as your car or house, as collateral to secure the loan. If you stop making payments or default, you can lose that collateral. The value of the collateral can vary widely, depending on the loan amount.
Which type of loan is riskier for the borrower, fixed or variable? ›
Taking out a loan with adjustable or variable rates probably won't be a good option, especially since there's a risk that rates may go up in the future. A fixed interest rate on a mortgage, loan, or line of credit makes it easier to calculate the lifetime cost of borrowing because the rate doesn't change.
Which loan is riskier? ›
Because your assets can be seized if you don't pay off your secured loan, they are arguably riskier than unsecured loans. You're still paying interest on the loan based on your creditworthiness, and in some cases fees, when you take out a secured loan.
