Article

Myths About Home Loans
October 15 , 2012

Myth 1: I can pay for the house myself - so I do not need to apply for a loan

Fact: Even if you are not plan to utilize a housing loan, applying for one from a Nationalized Bank has its merits. For a small processing fee, before they grant approval, they typically carry out a due diligence of the builder and the property to ensure titles and deeds are clear. On your own you would find it difficult to carry out this process comprehensively. Thereafter, you can always back out and not take disbursement, if you do not want the loan.

Myth 2: Even if I can prepay, it is useful continuing the loan for tax benefits

Fact: In most cases, this is not true. Despite the tax benefit, you will typically earn less on your money compared to the net interest outflow on the loan. If your finances are comfortable (i.e. you have some cash spare for contingencies), you would rather prepay and close the loan as soon as possible. This gives you much more flexibility and peace of mind in subsequent years.

Myth 3: My property is insured. I do not need any other insurance for the loan

Fact: There are two very different types of insurance you need. One is a property (fire) insurance that covers your home and its valuables from damage or theft. But even more important is what is called the 'Credit Guard' that is a life insurance policy for the person repaying the loan. In the event of an eventuality to this person, the insurance company pays all remaining EMIs to the Bank, and removes all liability from the person's family. This is an important additional life insurance you need to take while going for a home loan.

Myth 4: Interest rates in the first couple of years are critical to compare - thereafter it is anyway floating

Fact: It is true that most home loan rates are floating. However, be extra careful when you opt for 'teaser rate'home loans, where interest rates are artificially low in the first couple of years. This often lulls you into complacency and gives you a rude shock when payments jump after two or three years. While teaser rates are doubtless useful, you should first make sure you have repayment capacity for the loan you are taking, even at market rates, not just teaser rates

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