Owning a home is desired by one and all. However, given that this desire can only be fulfilled with large amount of funds, it continues to remain a desire for a lot of people. And when the time comes, they are unable to take the right decision while taking the home loan. This leads to getting into a raw deal and settling with a product that might not be best suited for them.
Following are the four highly common misconceptions. Read on to discover the truth on them.
Loans with lower rates are the best
This is the one of the most common misconception. While at the face of it, it seems logical. A lower interest rate would turn into one paying lesser amount in interest. However, it is advised that one should not fall into the trap of advertisements claiming lowest home loan interest rate. What the borrower should be looking at is the APR (annual percentage rate). APR gives the true picture of the actual rate being charged on the loan. It includes not just the interest but also the file charges, the processing fee, insurance or any other allied cost.
Truth being, APR is the actual cost of the loan and must be checked.
Fixed rate is better than floating
One may feel more in control over the repayment of loan with fixed rate of interest. A fixed rate will lead to complete non-fluctuation in the term of loan and or the EMIs. The floating rates on other hand may experience hike or reduction depending upon the market factors. But given that this loan is spread over long years, the market dynamics may actually turn out to be cheaper with floating rates.
Truth remains, the floating rate may be better than the fixed rate over longer duration.
Shorter term is better
While in general terms, this is true. But the borrower must not opt for a shorter term by stretching himself on the EMI amount. There are living expenses and unforeseen costs that just come one’s way and it is better to have the loan obligation pegged to an amount that one is able to pay comfortably. One must remember that a default on a home loan hits the credit profile the most and it can lead to inaccessibility to any kind of credit facility in future. The borrower may be left gasping for funds and may be required to look for a loan with bad CIBIL score.
Truth being, one has to be cautious while deciding on the loan term since it will have impact on the cash flows.
The focus has to be on faster repayment
Many feel that getting free from the loan repayment is the best option. Leading a debt free life is indeed a good situation to be in, and, having to pay off the largest ticket loan can aid in achievement of this objective. But focusing on this without financial planning can lead to deferment of financial objective of gaining financial freedom. Rather than focusing on the faster repayment, one should channelize energies on building a strong financial portfolio. The amount that is being used to repay the loan, if invested sensibly, can lead to building a large corpus for various needs, including retirement. The strength of cumulative interest earned over the investments must not be let out of sight.
One has to decide on the loan based on his current financial stability and the long term financial objectives. A wrong decision on this can lead to jeopardizing the objectives of making one financially stable and sound.
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