How to select the type of interest rate to suit your needs?

Getting a home loan currently is easy the difficult bit is deciding which type of home loan interest rate to choose. Financial institutions offer their customers with two major types of home loan interest rates namely fixed and floating interest rate. Both types have their benefits and drawbacks which every home loan applicant is required to go through before selecting the interest of their choice.

Fixed interest rate

A fixed interest rate allows the borrower to pay a fixed EMI each month to the financial institution. During the entire tenure of the loan, the EMI remains the same for the borrower. The fixed interest rate is not at all affected by the fluctuations in the market rate. One thing that a borrower must understand is that when opting for a fixed interest rate, during the repayment process, the beginning months are spent repay a majority of the interest rate and not the principal amount. So if a borrower is planning to repay their loan in advance at any point and wish to choose a fixed interest rate, they must opt for a shorter tenure to make the loan more affordable.

Pros

The fixed interest rate means that there is a lower risk involved.

One can plan their finances effectively and budget their money so as to ensure that the home loan does not put too much financial stress on the borrower.

In no way can any drastic or minor changes in the market rates affect it.

Cons

The only major drawback of opting for a fixed home loan interest rate is that it is a more expensive option as compared to floating interest rate.

Floating interest rate

A floating interest rate means that the interest rate charged on the home loan is open to change and gets affected by the fluctuations in the market rate. In this type of interest rate, there exists a base rate with a floating element. During the entire tenure of the loan, the EMI is constantly changing for the borrower. Extra effort is required from the borrower to calculate the correct EMI for the month and also pay it on times. One can always use the financial institutions EMI calculators to calculate an optimistic and pessimistic EMI based on expected changes in the market rate.

Pros

The greatest benefit that a floating interest rate holds is the fact that it is cheaper as compared to a fixed interest rate.

The changes in the home loan interest rate are subject to change. Every change in the interest rate occurs for a period of time only.

Cons

It is extremely difficult for individuals to predict the changes in the home loan interest rates each month.