Source : Mint
Home loans are segregated in terms of 'types' by interest rates. There are two main types - fixed and floating. Plus, there's one that tries to 'marry' both, what goes by the term, 'mixed'.
The main issue here is whether a fixed home loan is truly fixed. In effect, the term does connote a steady interest rate, but it isn't so all through the tenure of your home loan.
The one exception is a scenario where the bank specifically states that the lending rate will not be increased during the loan tenure. Normally, you may find a raise inserted somewhere along the tenure. "The National Housing Bank norms provide for a 'fixed' rate home loan to be re-set three years into its tenure," points out Kapil Wadhwan of Dewan Housing Finance Ltd.
When it comes to a floating rate loan, if one looks at the positive side, there's an element of flexibility. When the interest rates are reset, one has the option of either increasing the equated monthly installment (EMI) amount or increasing the loan tenure, subject to the overall restrictions in terms of the repayment age limit.
Interest rates constitute the 'dynamic' aspect of a home loan and just about every applicant wonders: to go in for the 1xed or the floating rate option. It was an easy decision until a few years ago, when interest rates were headed south. However, since mid-2005, when the sustained reduction in rates stopped and a gradual rise began, floating rate customers have been concemed about the higher monthly repayments and/ or increased tenures, says realtor Ramprasad Padhi.
Prospective home loan seekers are advised to opt for a floating rate home loan as in the medium to long term, the rates are expected to 'soften'. "It is always better to go in for floating interest rates as they are comparatively cheaper than a fixed rate home loan," says the Mumbai-based realtor. "Usually, there exists an interest rate difference of one or two per cent between the 1xed and floating home loan options, so there is a buffer for the first two or three rate increases," he adds.
Another thing to keep in mind is that loan tenures are typically in the range of 15 years or so, in which case interest rate cycles tend to even out over that period. So, if you have opted for a floating rate home loan, there is no need to panic and run for the fixed rate option - unless you are taking a shortterm loan. This can be a tenure of about five years or so.
Padhi says that one more thing to keep in mind is that your repayment capacity is also determined by the interest rates prevailing. "A higher interest rate hikes up the repayment amount (EMI) so the total loan amount sanctioned could reduce," points out Ramprasad. The ideal solution, he suggests, is for a home loan seeker to get his/ her home loan sanctioned at currently prevailing rates - and ensure Deace of mind in the future.
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