Selecting Which Type Of Interest Rate To Use – Fixed Or Variable

Once you decide to avail a home loan, the immediate thing that storms your head is selecting between fixed and floating rate of interest. It is easy to get stuck at this stage if you are not financially trained.

Usually, when the news papers splashes reports on banks raising housing loan interest rates in and their affect on Monthly Installments, you deem it better to select fixed home loan rates. In fact, your banker may also propose you to go for the same.

Now ideally as it should be, we assume that once you choose fixed rate plan for yourself the rate of interest will continue unchanged for the entire period you have fixed the interest rate for irrespective of any subsequent increase in the same. But actually this is not always the situation.

Here we demystify the nature of fixed interest rate mortgage transaction for you so that you can make an knowledgeable decision over the subject.

* Check the small print of a loan. The bank has the right to give you 30 or 60-days notice that it intends to increase its rates.

* The bank’s first-year rates are binding on the bank only for that short period of 1 or 2 months. The 2nd-year home loan rates are not binding at all. Neither are the bank’s 3rd-year loan rates.

* Force Majeure Clause

So, while you read your housing loan agreement papers, you can spot statement like this:

“Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.”

This is called Force Majeure Clause that enables the bank to undertake appropriate alterations in the interest rates on home loans they sanction to their borrowers.

So remember to look at refinancing every couple of years so that you do not pay too much. If you select a good housing loan company you can save a lot of money over the life of your home loan and in almost all cases the consultation cost is free.