Nowadays, getting a home loan is quite easy. However, one has to be choosy enough to get hold of the best. Proper homework and research is necessary before rushing into a conclusion. This will help the borrower find the best loan option available. The very first thing which needs to be decided upon before applying for a home loan is whether the applicant should go for a fixed rate loan or a floating rate loan.
What are Fixed Interest Rates?
Here, the repayment of the loan is fixed in equal instalments for the entire loan period. The interest rate also doesn’t change with the market variations. During the beginning of the loan period, the monthly payments are basically used to overhaul the interest and the principal amount is paid in the later part of the term.
Benefits of Fixed Interest Rates
- It is an excellent option for those who are really good at budgeting.
- It has a fixed monthly refunding schedule and it doesn’t fluctuate.
- The interest rates are always fixed irrespective of the market situations.
- It provides the applicant with a sense of security and assurance.
What are Floating Interest Rates?
Here, the interest rates vary with the market conditions. Applying for a home loan in a floating interest rate is basically attached with a base rate and a floating element. So, in case the base rate varies, even the floating interest rate will vary.
Benefits of Floating Interest Rates
- It is cheaper than the fixed interest rates.
- Even if floating rates go over the fixed interest rates, it will only be so for just a short period of time and not for the entire loan period.
- It brings a lot a savings as well.
So, as now you are well aware of these two interest rates and their benefits, let us now see their drawbacks as well.
o One of the most important drawbacks of fixed interest rate is that it is generally 1-2.5% more than the floating rate home loans. Also, if by any chance the interest rate decrease, the fixed rate home loans will not get the desired benefits of the reduced rate. This makes the borrower repay the same money every single time.
o The uneven nature of the monthly instalments of the floating interest ratesis its major drawback. Hence, financing the interest rate for home loans becomes difficult. It has also been discovered that due to the upsurge in the floating home loan rates, the applicants need to pay thousands extra per month as EMIs, which makes their budgets out of order.
So, when it comes to choosing the best interest rate for a home loan, most of the applicants go for the floating interest rates. However, it depends solely upon the applicant to choose the one suiting their budget and feasibility. One should always compare the home loans based on different parameters and recognise the best out of the two.