Factors to Consider Before Choosing Your Loan Interest Rate Type

Home Loans are being offered by many financial institutions and banks today. Consumers are flooded with many different proposals and offers, and all this ends with is a complete confusion in the consumer’s mind.

There are home loans based on two types of interest rates- fixed interest rate and floating interest rate. The first kind of rate’s name itself is self-explanatory – it does not change even when there are fluctuations in the financial market. The interest rate that is decided in the beginning of the home loan sanction is what is paid till the end, even if the rate drops or increases. This rate of interest is slightly higher than the second type of interest, which is the floating rate of interest – this rate varies with change in market conditions. Thus in both the cases the EMI paid would differ slightly.

The clauses in each case differ from institution to institution, but home loan rates are generally dependent on:

* The tenure of the loan
* A sharp increase in the interest rates

EMIs move either upwards or downwards as the base rate changes. It is because of these extremely mobile home loan rates that it is important for home loan takers to weigh all the pros and cons carefully before actually deciding on it.

Disadvantages of fixed rate of interest

 If you take a long-term loan, the rate of interest does not decline even when the market rates decrease and hence the EMI remains fixed.

 Consumers lose money in the case of falling interest rates

 Banks or financial institutions offer loans with a reset clause, which is a catch since they may revise your loan terms without any prior information

Its advantage is that it provides us with a sense of security and surety, since the EMI remains constant and we can plan our finances accordingly.

Disadvantage of floating rate of interest

 The only one point which may deter us from choosing this kind of a loan is that in case the economy is moving towards a very sharp rise in future, the loan would only get costlier in the near future

Its advantage lies in the fact that its rate of interest is slightly lower than a fixed rate of interest, thus leading to some savings.

Factors to be considered while deciding on the kind of house loan rate:

* Your EMI should be less than 35-40% of your monthly income
* If you would like to pre-pay the loan earlier
* If the rates of interest may vary sharply in the next 10 years, look at its past trend. If you perceive that there can be a big change, you could opt for a combination of fixed rate of interest in the first 3-5 years and then opting for floating thereafter.

Opting for a fixed rate loan may sound like the sensible thing to do, if you want a sense of uniformity and steadiness in your payments. Go for a floating interest loan only if you can insulate yourself from market fluctuations and the element of uncertainty with respect to the direction that lending rates may take when you move forward.