Different Types Of Home Loan Interest Rates

When applying for a home loan, one of the biggest decisions one needs to make is about the type of interest rate they wish. This is a very important decision as it will dictate whether or not you will be able to afford your home loan repayment in the future years to come. The two major options for home loan interest rates which financial institutions offer for their borrowers are fixed interest rate and floating interest rate. Both types have their benefits and flaws. Hence it is crucial for a borrower to study them both in detail before deciding which interest rate to choose from.

Fixed interest rate

During the tenure of the home loan, the interest rate charged does not change if the borrower applies for a fixed interest rate. In the home loan agreement provided by the financial institution, the interest rate which is to be charged will be mentioned. The reason why many consider opting for a fixed interest rate is that it is a relatively secure option. Since there is no change in the interest charged, the borrower does not have to deal with any type of risk. The changes in the market which affect the interest rate will not affect how much the individual will be required to pay each month as EMI. This allows one to plan their finances in advance to repay their EMIs on time. The problem with a fixed interest rate is that if the market’s interest rate falls, then the borrower ends up paying more for EMIs.

Floating interest rate

A floating interest rate changes depending on the market. This means that there is no way an individual can predict how high or low the home loan interest rates will go. Individuals who opt for a floating interest rate do so in hopes to take advantage of the low market rates to pay back their loan. There is however, no security as one cannot predict the floating interest rate changes. In some cases it can go higher than the rate charged as fixed interest rate. One must only opt for a floating interest rate if they are willing to take the risk.

The decision as to which type of home loan interest rate will vary with different borrowers. If security is what a borrower wishes for, then they must opt for a fixed interest rate. If however the borrower wants to try and get a more affordable interest rate and does not mind the risk, they can opt for a floating interest rate. There are several financial institutions which also allow individuals to shift from one interest rate to another. All borrowers must be aware of the interest rates options their financial institutions provide then with.