Most of us have a dream of owning a house and a home loan is one such way through which we can accomplish this dream sooner. Home loan is a little different than other types of loan considering the fact it has many layers that home buyer has to decide such as the downpayment they should make, loan amount to go for, type of interest rate to choose, locality in which they are buying the home, etc. It is imperative for a home buyer to think about various aspects of a home loan before finalizing as this could affect their life for years. One such decision to make is the type of interest rate to choose from- fixed or floating interest rate. This decision has a financial impact on 1 crore home loan EMIand hence demands serious analysis. So, what is the difference between the two, and which is better for you? Here are some ideas to help you make an informed decision.
Fixed Interest Rate For Home Loan
Fixed interest rate throughout the tenure: The interest rate on a fixed-rate loan for example on 1 crore home loan EMI is fixed at the moment the loan is taken out. Aside from a standard fixed-rate product, where the interest rate remains constant throughout the loan’s term, there are variants available that allow you to fix your interest rate for specific periods of 2, 3, or 10 years and are available with the lender’s right to reset at any time.
Predictability factor helps you plan your budget: Choosing a fixed-rate home loan gives you a sense of assurance since you know what your repayments for 1 crore home loan EMI will be right from the start, giving you the confidence to budget and manage your money effectively. So your loan tenure, 50 lakh home loan EMI requirements, and total interest outflow are all quite predictable.
When does it make sense to choose a fixed-rate home loan?
Look at the following cases before deciding on fixed rate home loan:
- Comfortable with the 50 lakh home loan EMI amount you have agreed to pay. Just remember, it should preferably not exceed 25-30% of your monthly take-home pay.
- Based on the reports, you are anticipating increased interest rates in the future and would like to lock in your home loan at the current interest rate.
- If interest rates have lately fallen and you are comfortable with the present level, lock in at this rate with a fixed-rate loan. For example, if the interest rate on your home loan was 10% a few years ago and has now dropped to, say, 8.5%, and you are mentally and financially happy with this rate, you can get a fixed-rate loan.
Floating Rate Home Loan:
Interest rate Linked with the lender’s benchmark rate: These loans, often known as ‘adjustable rate home loans,’ are linked to the lender’s benchmark rate, which moves in tandem with the market interest rate. When the benchmark rate changes, the interest rate on the 1 crore home loan EMI changes proportionally.
The interest rate on these loans is modified at regular periods. It might be calendar intervals such as every quarter or half of a fiscal year, or it could be unique to each customer based on the date of his home loan’s initial disbursement. Alternatively, the reset might be linked to the anniversary of your loan. In general, financial institutions reserve the ability to change the interest rate reset cycle.
Interest rate is dependent on market changes: If market rates change throughout the review period, your rates on 1 crore home loan EMI will be reset higher or lower, depending on the situation. When interest rates reset, the loan’s duration is frequently re-adjusted to account for the new interest rate. If the interest rate rises, the remaining loan term will be prolonged, and vice versa. This is done to minimize frequent EMI changes, which could affect your cash flow. If you choose, you can ask the lender to change your 50 lakh home loan EMI rather than the loan term.
When it makes sense to choose Floating Interest Rate Loan?
In the following cases, you should choose a floating-rate mortgage:
- If you anticipate that interest rates will decline in general over time, choosing a floating rate loan will result in the interest rate applicable to your loan reducing as well, lowering the cost of your loan.
- Floating rate loans are appropriate for those who are uncertain about interest rate developments and would rather use market rates to pay 50 lakh home loan EMI.
- If you want to save money on interest in the short term, floating-rate loans are normally set at a marginally lower rate than fixed-rate loans, giving you some benefit in terms of loan cost.
Finally which one should you choose?
If you are still undecided about which type of home loan interest for 50 lakh home loan EMI is best for you, consider a combination loan that is part fixed and part floating. This is especially appropriate for you if you currently have other loan repayments and your cash flows have been scheduled to fulfil your loan commitments for the first 3-5 years; during this term, you can choose a fixed rate. Following this stage, you can choose the floating option for the remainder of the loan’s term.
Fixed-rate loans are often slightly more expensive than floating-rate loans. If the difference is significant, you may be persuaded to take out a Floating rate home loan. However, if they are almost equal or the difference is minor, you should consider your situation and needs before deciding whether to go with a fixed-rate loan or a floating-rate loan.
Normally, forecasting future home loan rates is tough. It is possible that the housing loan interest rates can change against your expectations, leaving you with an unfavourable interest rate option. However, you should not be concerned about making the wrong selection for your home loan. Remember that you can switch between a fixed rate and a floating rate home loan at any moment; lenders normally charge a small fee for this service.
To summarise, one cannot state that one type of loan is superior to another; whether you choose a fixed or floating house loan interest rate depends on your needs and financial profile. To choose the best solution for you, you must evaluate the variables outlined above. Though the loan you choose has a significant impact on the final cost of your home, you have the ability to adjust how interest is charged on your home loan depending on the circumstances.
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