Buying a house is one of the
major decisions taken by a family. An important component of realizing your
dream home is availing a home loan. While availing a home loan, borrowers
should familiarize themselves with key concepts associated with home loans ie.
Loan amount (principal), repayment tenure, rate of interest, equated monthly
installment (EMI) and pre-payment charges (if any). These parameters are
documented by the lender during the loan approval process and communicated to
the borrower through the sanction letter.
One of the key components is the rate of interest charged by the lender. The different types of rate of interest offered currently are: fixed rate, floating rate and part fixed-part floating rates of interest. The fixed rate does not change during the tenure of the loan. A floating rate of interest is the base rate plus an element of margin, to arrive at the final rate of interest.
In a new type of combination
home loan, for the first few years, interest is at a fixed rate, not higher
than the floating rate. At the end of the period, the borrower is given a
choice of renewing the fixed interest rate or converting to a floating rate.
Some lenders provide the
facility of converting home loans from fixed to floating rates, by charging a
conversion fee. It can be beneficial to the borrowers in the long run.
When deciding which rate is
best for you, remember a few rules. Consider a floating rate of interest if you
want to avail a home loan for a longer tenure and are comfortable with changes
in interest rates over a period of time. If you want to enjoy the comfort of a
fixed EMI throughout the tenure of the loan and are willing to pay a slightly
higher interest rate, opt for fixed rate. Part fixed – Part floating rates are
suitable for you if you prefer longer duration loans, when the interest rate
drops lower. Through this, you can get long-term interest savings of floating
interest rates and use benefits of a competitive fixed rate of interest in the
first few years.
