Owning a home is a dream that everyone cherishes very dearly. But looking at the current financial status and the real estate market situation, it is difficult to fund the home of your dreams and you often end up taking a Home Loan. Taking a Home Loan can ease your financial burden by a lot. The bank offers two types of Housing Loan interest rates – fixed interest rate and floating interest rate.
Find out the pros and cons of fixed and floating interest rate below:
- What is Fixed Rate of Interest?
If you have a Home Loan with a fixed rate of interest means that you will pay a constant rate of interest over the tenure of the loan. As the interest rate is affected by market fluctuations, in a fixed interest rate loan the interest rate is not affected by it. In the earlier tenure of the loan, the major part of EMI pays the interest and the repayment of the principal amount is done once the interest amount is paid.
Since the rate of interest does not change, one of the advantages of fixed interest rate is that you can be certain about the amount you have to pay for the monthly installments. If you are the type of person who prefers a fixed expense in your monthly income then you should opt for a Home Loan with fixed interest rate.
Fixed interest rate Home Loans are 1-2.5% points higher as compared to floating interest rate. It can also happen that the rate of interest can decrease due to various other factors like change in market environment. In such a situation, people who have opted for this type of loan will not get to reap benefits of the situation. The borrower, i.e. you will still have to pay the same interest rate that you were paying before.
- What is Floating Rate of Interest Home Loan?
A Home Loan with a floating interest rate is when the interest rate that you have to pay varies according to the current market conditions. A Home Loan with a floating interest rate has a base rate and a floating element. When the base rate is revised upwards or downwards, which varies according to the market condition and the floating interest rate is also affected.
The floating interest rate Home Loan is cheaper than a fixed interest rate Home Loan. The floating interest rate is affected by a lot of things and hence varies a lot. Even if the floating interest rate is high, the floating rate will not be high for the entire tenure. The floating rate will also fall for some time over the tenure and hence it can also help you in saving some money.
Since the floating rate keeps fluctuating, this type of loan makes it difficult for you to budget. Moreover, the constant change in the interest rate makes it extremely unpredictable. Borrowers often reap the rewards of choosing a floating rate Home Loan as long as the rate of interest does not go beyond 11.5%.