Home loans are quite popular because they help you buy your own home. The interest rates are also low which makes the loan affordable. When you search for a home loan, you search for the lowest interest rates. However, in your search, you forget that home loan interest rates are of two types and the type you select would affect the overall interest payable on the loan. Do you know what these types of rates are?
Home loan interest rates are of two kinds – fixed rate and floating rate.
Fixed interest rate
A fixed interest home loan is a loan where the rate of interest applicable at the time of availing the loan remains fixed throughout the loan tenure.
Floating interest home loan
Under floating rate home loans, the interest rate is not fixed over the loan tenure. It changes with the change in the economy and macro interest rates.
Both fixed and floating rate home loans are different from one another. Here’s how –
Difference between fixed and floating rate home loan
|Fixed rate home loan||Floating rate home loan|
|The rate of interest remains fixed throughout the loan tenure||The rate of interest varies throughout the loan tenure|
|The EMI remains fixed over the tenure||The EMI might remain fixed or vary with the change in the interest rate|
Which is better?
Both fixed and floating interest rates have pros and cons. Knowing these pros and cons is necessary to know which rate is better. So, let’s understand the pros and cons of each type of interest rate –
Fixed interest rate
|· The EMIs are fixed throughout the loan tenure which helps you in budgeting the loan repayment easily||· The interest rate remains the same even if there is a decrease in macro interest rates|
|· Even when the interest rates rise in future, the fixed interest rate does not rise. It, therefore, proves economical for the borrower||· The rate is higher than floating rate of interest|
|· The rate gives certainty and mental security as you know the exact repayment of your home loan|
Floating interest rate
|· If there is a reduction in the interest rates in future, the floating rate would also reduce. This would reduce the EMIs and make the loan more affordable||· Monthly instalments are not fixed. As such, it becomes difficult for borrowers to estimate and budget the repayments every month|
|· The rates are cheaper than fixed interest rates||· The rates might increase if there is an increase in the interest rates in future|
Choosing the ideal rate
When making a choice between fixed and floating interest rates, you should first find out which rate suits you and then make a decision. If you believe that interest rates would fall in the future, opting floating rates is a good choice. However, the uncertainty of the EMI should be taken into considered. Alternatively, if you want fixed home loan EMIs irrespective of any interest rate changes, fixed rates are more suitable.
So, understand the difference between fixed and floating interest rates, see which one suits you and then choose your home loan.