Finance Blog

What are the Types of Interest Rates Available on Home Loans

If you plan to invest in a property, a home loan seems to be a practical solution. They are long-term in nature, and so, there are certain vital elements of every home loan that a borrower must understand. Key factors of every home loan agreement are interest rate (charged by banks and Housing Finance Companies), total loan amount, loan tenure, effective monthly EMIs and the borrower’s credit score. An easy and sure way to find what works best for you is using a home loan calculator.

While the rest of the key elements are direct, there are different kinds of interest rates that are charged by most of the banks, such as:

Fixed-rate of Interest

In this arrangement of calculation, the rate of interest is flat throughout the period of borrowing. There are no changes in the interest charges, and so, the EMI amount also remains fixed. However, you can still move to the floating rate of interest plan, contingent upon the offer. But this only happens once you have covered a certain period of your loan tenure.

Why you must consider it: As the name suggests, a fixed rate of interest plan helps you prepare for the expenses well in advance. You know exactly how much you’re going to pay, which leaves no room for surprise or hidden charges. You will be protected from paying extra if the rate changes at any point or the interest rates increase during your loan tenure.

Why you shouldn’t: If the rate of interest falls, you will lose the benefit of saving the extra bucks.

Floating rate of Interest

By floating, the banks and financial institutions mean that your interest rate will depend on the market and the current interest rates. Multiple factors determine the bank’s rate, such as RBI’s policy and loan rate modifications, the bank’s reaction to the new policies and so on.

Why you should consider it: The upside of picking this plan is that you have the advantage of being charged dependent on the most recent rate. Lesser the rate, more money you save on interest charges.

Why you shouldn’t: However unlikely, if ever the interest rates rise, you end up paying a higher amount.

Home loan eligibility calculator

There are free home loan calculators that can calculate the amount of interest you will pay, depending upon the loan amount, interest rate, and tenure. An average home loan tenure is about 20 to 30 years, and by using this as a standard, you can find out the EMI amount. There are certain things you must know before using a home loan EMI calculator:

  1. The length of loan tenure determines the interest charges. In other words, longer the tenure, higher the interest charges and the EMI amount.
  2. Floating rate of interest is usually cheaper than the fixed interest rates.
  3. Like every loan type, you pay more towards the interest charged and less towards the principal in the first few years. By making regular prepayments, you reduce the outstanding principal amount and thereby the EMI amount.

Conclusion

Always use a home loan eligibility calculator to compare interest rates as it helps you to save more. Cred offers easy and compact home loan calculator using simple mathematics

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