The concept of a home loan is well known all across India. However, not everyone knows that a home loan, just like many other loans, can be of two types which are fixed interest home loan and floating interest home loan. So, how are these different from each other? Even more importantly- which is better? Let’s find out.
Home Loans: Fixed Interest Vs Floating Interest
As the name suggests, a fixed interest home loan is a loan with a fixed interest rate. In other words, the home loan interest rate doesn’t change at all throughout the tenure. A floating interest loan, on the other hand, has a flexible interest rate which can change from time to time depending on the market conditions. So, it may go higher or lower than today’s rate.
Now that you know the difference between a floating interest rate and a fixed interest rate, we can proceed to address the billion-dollar question which is- “which option is better?”
Well, it goes without saying that if you don’t want uncertainty and has no risk appetite, and then you would want to take the fixed option for the home loan interest rate. However, there is a catch- these loans usually have higher interest rates (as much as 1% to 2.5%) compared to floating interest loans. Also, if the bank lowers the interest rate in the future, then you can’t take advantage of the same as you will continue to repay the loan at the original rate.
It’s really up to you with what you want. If you don’t want to take any risk at the cost of a possible higher interest, then fixed rate loan is for you. However, if you a way of knowing that the interest rates will come down in the future and will be advantageous in the long run, then you can go with the floating rate option.
How Important is Interest Rate “Type”?
As we have already discussed the type of rate you opt for (floating or fixed) can greatly affect the repayment. However, it’s important to consider many other factors as well. These are:
Other Options and Timing
A home loan is a big financial responsibility. Thus, it’s important that you take your time and compare as many options as you can. There are a number of traditional banks, housing finance companies, and NBFCs that offer home loans. Thus, the terms and conditions, interest rates, etc. can vary greatly.
Many banks offer attractive interest rates and perks during festive seasons such as Diwali, Christmas, etc. So, if you are not in a hurry, you can wait for a festive season to see if you are able to get a good deal.
CIBIL Score Calculation
Your credit score is one of the biggest factors that decide how easily you can get a loan and at what rate of interest. However, you can easily check it by submitting an online application to any of the top credit bureaus that are involved in credit or CIBIL score calculation. In fact, if this is your first time, you can get it for free (RBI has directed all credit rating agencies to offer one free credit report per year).
If you have a high CIBIL score you can get your loan approved quickly. You can also negotiate with the lender over the rate of interest by showing them your high creditworthiness that’s appearance through the high score.
Hidden and Additional Charges
When you apply for a loan, it’s important that you inquire about all the types of fees you have to pay. These include processing charges, legal fee, administrative fee, service charges, etc. What’s more, the processing charges alone can be as high as 1% of the entire loan amount, which is a lot!
So, in a nutshell, you must be aware of how a fixed interest loan differs from a floating interest loan. However, you should also take the other factors into account as well to go with the best offer on the table.
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