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A home is one of the biggest investments in a person’s life. People often save for a long period of many years to purchase the house of their dreams. It is always not possible to make the complete payment for a house as it is often a big amount, so the individual has to take a home loan. There are two types of home loans- fixed and floating. The banks and the NBFCs offer both types of loans, so a person should be aware of the differences in order to take advantage of the situation and avail loan at a lower rate so as to save money. This will make his personal financial condition stronger. We will discuss both fixed and floating home loans.
Fixed-rate home loan-
When a person avails of the fixed rate home loan the rate of interest is constant throughout the entire tenure of the loan. The market fluctuations do not affect the rate of interest and it remains constant. The amount of principal and interest paid may vary over the months but the total payment remains the same and this makes budgeting easy. Fixed-rate loans normally have a slightly higher rate of interest as compared to floating-rate loans.
When should you opt for a fixed-rate home loan?
- When you hear and perceive that the interest rates are going to raise in the future you should opt for a fixed-rate loan.
- The EMIs have come down and you are comfortable paying the EMIs so you can lock in the loans at that low level.
What are the advantages of a fixed-rate home loan?
- The loan payment is the same over the years so there is a certainty of how much a person has to pay every month.
- Budgeting becomes easier when a person is aware of how much they have to pay every month. They can allocate the remaining savings towards investments.
Floating rate home loan-
Floating rate home loans are also called adjustable rate home loans. It changes or fluctuates with the market conditions. The loans are linked to the lenders’ benchmark rate which moves in tandem with the market interest rates. When the benchmark rate changes the interest rate on the loan also changes. The interest rate on these loans is reset at specified periods which could be quarterly or half-yearly.
When should you opt for a floating-rate home loan?
- When a person expects interest rates to fall in the future they can opt for floating rate home loans as it would reduce the interest rate applicable to the loan to fall; in the process reducing the cost of the loan.
- Floating rate home loans have a slightly lower rate of interest than fixed loans and you can save in the near future.
What are the advantages of a floating rate home loan?
- In floating rate home loans there is no pre-payment penalty. The borrowers can clear their debt burden without worry.
- The floating rate loans are lower than the fixed rate loans.
One can certainly consider the factors discussed above before selecting a loan. For a common person not well attuned to the financial market, it is difficult to predict which way the interest rates would move. The home loan interest rates may move contrary to your views, but you have the option to switch between the fixed and floating rate home loans.