If you are on the verge of finalizing a home loan, a big dilemma that you might be facing is whether to opt for a floating or a fixed rate of interest. Since a home loan is a long term debt obligation, even a slight difference in the interest rate translates into a big sum of money. Hence it is usually a tough decision to make. You need to understand the fundamental difference between these options and weigh the pros and cons of each before taking a final decision.
What is Fixed Interest Rate?
The fixed interest rate on the home loan remains same for the entire tenure of the loan. It is not affected by market fluctuations. The equal instalments remain constant throughout the loan term. In the early part of the loan tenure a major component of the EMI goes into servicing the interest and the principal is serviced in the later part. These days fixed interest loans are not really fixed for the entire tenure. Banks reserve the right to change the rates after every 5 years or so.
When opting for a fixed rate is a better option?
What is Floating Interest Rate?
Floating home loan interest rate is tied to a base rate and a floating component is added. It is dependent on the market economics. Depending upon whether the base rate is revised upward or downward the floating interest rate is also revised at periodic intervals.
When opting for a floating rate is a better option?
Keep an eye on the macroeconomic indicators like inflation and interest rate movements and monitor the RBI’s policy to gain some insight into the future interest rate cycle. Also analyse your personal needs to decide which option suits you the best. Compare the home loan from different institutions and understand the various parameters in detail before making a final choice.
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