Dispelling the myths about home loans is important, especially because certain false assumptions can convince you not to get the loan that you actually need to buy your dream house. Some of the most common myths that are floating around include:
You only need to save money for a deposit.
It is important to know that you have to save some money for other things besides the deposit. Some costs that relate to purchasing a house include inspection and legal fees, lender’s charges, stamp duties, and moving fees. All these can reach up to 7% of the house price. This means that for a $400,000 house, the amount of extra costs can be up to $28,000, a significant chunk of change.
You should always choose the loan with the lowest interest rate.
There are many other things that you should consider besides the interest rate. For example, most home loans with low interest rates are not only inflexible but also come along with huge administrative fees, which can double the monthly installment.
Prepayments attract huge penalties.
This is simply not true. While some banks do not charge prepayment penalties at all, the lenders who require moderate fees decline them after about 3 years.
A variable rate home loan is the worst possible financing option.
Sometimes, a variable rate is better than a fixed rate because it delivers greater flexibility for exiting a loan. Most fixed rate home loans are costly to exit and cannot save you money if the interest rate falls.
Term extension on home loans saves you money.
This is a completely false assumption. Although loan term extension reduces monthly payments, it actually increases the administrative and interest costs of the loan. The best strategy to cut down the costs accompanying a home loan is to pay more than the minimum monthly repayment.