Home loan interest rates explained.

Just like choosing your dream home, which involves so much of thought; choosing home loans interest rates too is no easy decision. And just like the type of home varies from person to person, your home loan interest rate too depends on certain parameters that vary from person to person. This article will aim at giving you a crash course on home loans interest rates, how they’re determined and their types.

So how is your home loan interest rate determined?
Your home loan interest rate is something that isn’t fixed, it isn’t a rigid number. It varies basis a few parameters. These parameters include your credit score, which is an overall report of credit history. If you’ve missed credit card payments or defaulted on previous home loan EMIs then you will have a lower credit score and a higher interest rate. Whereas if you have paid your credit bills and loan EMIs in a timely manner, you will have a higher credit score and a lower interest rate.

Another factor to influence the interest rate is the loan amount, higher the loan amount, higher the interest rate. Next on the list of factors that influences your interest rate is the amount of down payment you put down, higher the down payment, lower the risk you pose to a lender, and the lower the interest rate levied on you will be.

Next is the tenure, longer the tenure higher the interest rate, whereas shorter tenure will generally invite lower interest rates.

The last factor influencing the interest rate you receive is they type of interest rate you choose to go with and this will bring us to the next part of this article, types of interest rates:

What are the kinds of interest rate to choose from?
When it comes to home loans interest rates, one size doesn’t fit all. That’s why financial institutes offer varying kinds of rates. But broadly there are three types of home loans interest rates out there, namely, fixed, floating and semi-fixed interest rates.

Looking for certainty and security? Opt for fixed interest rates.

Fixed, as the name suggest, entails an interest rate that will remain the same over the entire period of your loan tenure. This kind of home loan interest rate offers recipients the scope to plan their finances better and adds an element of foresight and structure to the home loan process. The disadvantage though with fixed home loans interest rates is that fixed rates are usually higher than floating rates at any given point. And say if there is considerable market growth or change in government policy that lowers the interest rates on home loans, the fixed rate home loan will never see the benefit of these reduced rates.

Don’t mind a little risk to avail greater savings? Opt for floating interest rate.

The floating home loans interest rates starts of lower than the fixed kind of interest rate. With the floating interest rate, the base interest rate stays the same but the floating element may fluctuate over the period of your home loan tenure based on the current market scenario or government policies. If the overall market scenario seems good and stocks are on the rise, your interest rate will tend to fall. So, in the case of long term term loans, of say 20 years, if the signs point towards overall market growth and development, choosing a floating scheme will see your interest fall over the years, which even if it is marginal, adds up to a substantial amount of savings. The disadvantages with the floating home loans interest rates is that, with varying monthly installments, one cannot budget their repayment structure systematically and also there is the fact that falling market scenarios or change in government policies may see the rise in your interest rate.

Medium tenure loan and fixed income? Then opt for semi-fixed home loan.
The semi-fixed home loans interest rates are a combination of fixed and floating rates. With the interest rate remaining unchanged for a specified period of time, after which, the rate of interest is converted to floating. This is ideal for medium term loans and for individuals who don’t expect their income to grow over the period of the loan. The advantage with the semi-fixed interest rate is that it is ideal for a situation when the interest rate in expected to rise and then fall.

It is wise to consider all your option, weigh your own financial situation against these options and then accordingly choose a loan interest rate that suits your needs. And it goes without saying, that the choice is one that requires a great deal of thought and contemplation. We hope this article has been of some help and all the best.