Buying a home is a dream for most, and a home loan helps make that dream come true. When you apply for a home loan, you must do your homework and then choose after careful consideration. However, despite best efforts, errors may occur.
Below, we focus on 5 common mistakes you should avoid when taking out a home loan.
1. Focus only on interest cost.
When apply for a home loan, the interest rate is the most crucial aspect, as it has an impact on the overall cost of the loan. While mortgage rates are essential when comparing lenders, you cannot overlook other fees. Often applicants only focus on interest rates and ignore fees such as processing fees, late payment penalties, foreclosure fees, legal fees, etc. Processing fees range from 0.5% to 2% of the loan value; it is a substantial amount because a home loan is counted in thousands of dollars.
2. Not buying insurance coverage.
Homes provide a lot of security for a family. However, in the event of the unfortunate death of the borrower, the family is left with a huge loan burden and may end up losing their home if the loan is not repaid. Therefore, purchasing adequate insurance coverage for the loan can protect your family from any financial distress.
3. Apply to multiple lenders simultaneously.
The lender sends a request to credit rating agencies to access your credit score when you apply for a home loan. Assessing your credit report is the first step in reviewing your loan application. The loan is sanctioned if the applicant has a score acceptable to the lender. However, each request for credit by a potential lender (known as a serious request) reduces your credit score by a few points. Therefore, if you apply to multiple lenders simultaneously, your score may be negatively affected and your chances of loan approval will be lower.
4. Choose a shorter term.
Your loan EMIs depend on the amount you borrow, current mortgage rate, and the duration of the loan. You might be tempted to ask for a shorter loan term because it lowers the overall interest cost and you want to pay off your debt as quickly as possible. However, a shorter tenure could result in higher EMIs that you may struggle to pay each month. So it’s a good idea to use an EMI calculator to estimate monthly installments so you can budget your monthly expenses accordingly. Then choose a loan term based on your repayment capacity.
5. Choose between fixed or floating.
Another common mistake when applying for a home loan is not making the right choice between the fixed rate and the variable rate of the loan. Your loan can be fixed rate, meaning it is unaffected by market conditions or RBI policy for the duration of the loan. Floating rates change as per RBI policy. If you are applying for a shorter term, a fixed rate might be a good idea. On the other hand, if the duration of your loan is long, it is better to opt for a variable rate.
Buy your dream home with a loan and avoid the mistakes mentioned above in order to get the best deal for yourself.