Some Common Misconceptions About Home Loans – Know The Truth!!!

Buying a house is a lifelong dream for many of us and since making a down-payment of many lakhs to buy our dream-home is not practically feasible for everybody, we almost always end up going for a “Home Loan” or “Housing Loan”. Easily 2 out of 3 people reading this article would have either taken a home loan or at least would be thinking about going for a home loan. As with many things in our country, there are a lot of misconceptions about home loans which effectively scare us from moving forward. The purpose of this article is to help you understand the truth about those common misconceptions…

Why this Article?

Signing up for a home loan is a HUGE financial decision that will impact your life for the next 10/15/20 years. I have written a few articles in the past about “Buying a Home”, and “How to handle a Home Loan Part Repayment”. However, based on the queries received from blog readers it is pretty obvious that many of them have a lot of misconceptions and hence I thought, why not write something to clear them…

Misconception No. 1:Fixed interest rate is better than floating interest rate

Home Loans usually come in two forms – one with a fixed rate of interest and the other with a floating rate of interest. If you are someone who doesn’t want to risk the fluctuation that is possible on home loan rates, you can choose the fixed rate option. However, there is a catch here – Even if in future loan rates go down, you will still continue to pay the high rate. If you had chosen the floating rate option, reduction in home loan rates would benefit you greatly. But, this floating rate option has its drawback. In case market rates go up, so will yours. So, you need to think and decide based on the market outlook.

Anyways these days banks don’t offer “Fully Fixed” home loans like they used to, before. Most fixed rate home loans these days are hybrid loans where the rate of interest is fixed only for the first few years and the bank reserves the right to review the rate of interest after this initial period.

Fixed Rate loans usually charge the customer a slightly higher rate of interest than floating loans because the bank cannot hike your interest even if the market rates go up. I think going for a flexible rate of interest is OK given the current market outlook because the rate of interests will not go up by more than 0.5% or 1% and it does not make sense to pay the additional interest right away…