Funding a home purchase is serious business. Considering that homes cost a significant amount, purchasing one causes a significant strain on one’s monthly income. Choosing an inappropriate home loan can make matters much worse and become a source of constant stress.
The one factor about loans that worries most future home owners is interest rates. With lenders offering fixed and floating rates of interest, borrowers are often conflicted between the two options. Conventional wisdom prompts many a borrower to choosing fixed interest home loans over floating rates. However, in the event of falling interest rates, these individuals stand to lose out the chance to benefit from the same. Moreover, once you have taken a home loan with a fixed interest rate, if you wish to switch to a floating interest rate it comes at an additional cost.
So how can one identify the right home loan interest rates for oneself? Ask yourself the following questions
- How high is your current EMI?
If it is an amount that leaves a comfortable level of disposable income, then you can consider fixed interest rate home loans. - How is the interest rate expected to be in the next few years?
You can gather this information from professionals in the banking field as well as experts. Compare this to the tenure of your loan and gauge what the best home loan option could be for you. If interest rates are likely to fall for a few years, you could consider floating rates. On the contrary, if they are likely to rise, go in for the fixed option. - Can you afford fluctuations?
At times, home loan borrowers prefer a sense of certainty when it comes to their financial commitments. If you cannot afford a possible hike in interest rates in the coming years, you should possibly stick with fixed rate interest. - Is there a likelihood of prepaying the home loan?
If you are likely to prepay your home loan, a floating interest rate might be rate for you. If not, you can confidently choose the fixed interest rate. - What is the loan tenure?
If the loan tenure is shorter than 10 years, it makes more sense to opt for floating rate of interest. This is because the interest outflow for shorter tenures is usually lesser.
Applying for a home loan can seem like a daunting task. One key thing to keep in mind is that you should decide based on your specific circumstances and capability to repay the loan. Long term financial commitments should be made with utmost pragmatism.