Do you know interest cost can be reduced?

The home loan can help people to accomplish the dream of buying a home. It is a long term liability that stays with the borrower for decades. Home loans interest rates are the most critical thing that the borrowers consider before applying for the loan. A slightest difference in the rate can translate into significant differences in the interest payout. Another important part of the home loan is the EMI, the borrower has to pay. The EMI makes 30-40% of monthly expenditure. To ensure that this monthly expense remains within the affordable limit customer opts for longer repayment tenure.

Home loans interest rates is the amount of extra money the borrower pays to the financer for the loan amount. For instance if the borrower takes the loan of Rs 40lakhs at 8.5% rate of interest per annum for ten years, then the borrower would pay Rs 3,40,000 approximately at the end of the loan repayment tenure as the interest cost.

This interest rate is classified under three heads:

• Fixed rate of interest: as the name suggests, it is fixed for the whole loan repayment tenure. A risk averse customer who believes in stability opts for this rate, as their monthly budget fixed for EMI remains the same unaffected by the market fluctuations and government policies. It is slightly more than the floating rate.
• Floating rate of interest: it is also termed as adjustable rate. The market economy has a direct impact on this ROI. It reduces with healthy market condition and increase with inflation. Government policies also affect the floating rate. The monthly EMI fluctuates with the fluctuating rates. Customers who like to take chances and are ready to pay the higher rates during inflation in order to enjoy low rates in the healthy market economy.
• Truly fixed or semi-fixed ROI: this interest rate is fixed in the initial period for a committed time, after that it switches to floating rate.

From the above rates the borrower can choose any kind of rate. They can switch to other kind of interest rate from the existing ROI with some minimal charges depending on their needs. Interest cost is crucial; this chunk of amount can dig a hole in your wallet. Crafting the loan tenure and the EMI diligently can help you save chunk of money.

Considering some factors may help you reduce the interest cost on the home loan from the financer.

Shorter tenure: in shorter tenurethe principal amount is repaid faster. The home loans interest rates are calculated on the outstanding loan amount thus quick repayment results in lower interest cost. Longer tenure increases the interest cost, though the interest rate is low.

Pay an extra EMI every year:incase the monthly budget does not allow any increase in the monthly EMI to reduce the tenure; you may use annual bonuses and other savings to pay at least an extra EMI every year, this may reduces the interest cost by reducing the loan tenure.

Increase the EMI by 5% each year: another smart choiceto reduce the interest cost is to increase the EMI by 5% with increase in income.

It is always beneficial to reduce the interest cost burden. You already have to pay loads of money for the principal amount, and increased interest cost will make the loan tenure exhausting for you. So plan accordingly to save yourself from being a defaulter.