Whenever we plan to take a home loan the most important decision after finalizing the financial institution is the Types Of Interest Rates on your loan. Before finalizing this it is better to understand the different types of interest rates offered by the financial institutions these days.
Fixed Rate Of Interest:
As name suggest this interest rate remains fixed during the tenure of loan. But this kind of interest rates are little expensive as compare to floating interest rates as there is no risk attached. But this options is not available at all the financial institutions.
Advantages Of Fixed Rate Of Interest
- Avoid Market Risk :- Fixed rate of interest ensures fixed payment of interest during the life time of the loan no matter the trend of the market rates. Which means whether the market interest rates goes up or down there is not going to be any change in the installments i.e EMIs of the borrower.
Disadvantages Of Fixed Rate Of Interest
- Not Available :- Most of the financial institutions do not offer fixed rate of interest on loan especially at the time of lower rate of interest. Which makes it difficult for a borrower to get loan on fixed rate.
- High Interest Rate :- This type of interest rates are little expensive as compare to the variable interest rates as it helps you avoid the risk of uncertainties which can pull undue financial pressure on the borrower due to sudden rise in the market rates.
- Loss Of Benefit On Falling Rates :- If you opt for fixed rate of interest then you fail to take the benefit of falling interest rates as your rate of interest is free from market fluctuations. (Refinancing your loan can solve this issue)
Fixed rate of interests is a better option if the prevailing rate of interest is lower than the average of historical interest rates. So before finalizing your decision it will be wise to look at the interest rate figures of the last few years, it will help you know the market trend.
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Resettable Fixed Rates:
Some financial institutions also offers this type of fixed rate of interest. In this case, the rate of interest is fixed for a set period of time say for initial 3 to 5 years; and after the completion of the set period the interest rate get adjust to a new rate for the next period according to the market lending rate.
Advantages Of Resettable Fixed Rates
- Resettable Fixed Rates offers the combination of benefit of both fixed as well as variable/ floating interest rates.
- You can avail the benefit of lower interest rates as the interest rates get revised after a set period of time. So if the interest rates falls then at the time of revising rates your rate of interest will be reduced according to the market lending rate.
- You get better control and predictability on the loan payment (EMIs) as compare to floating interest rates.
Disadvantages Of Resettable Fixed Rates
- Market fluctuation can affect your loan payment (EMIs). At the time of revising rate of interest if market rates are higher, then your next set of EMIs will be calculated on the market rate.
Resettable Fixed Rates are better option for the borrowers how have plans to pay off the entire loan in a short period of time say in the first set of Resettable Fixed Rate. Usually Resettable Fixed Rates offer lower rates in the initial years and then revised at the market lending rate for the next set period.
Floating Interest Rates:
This is very popular type of interest rate which is offered by all the financial institutions. Also known as adjustable, flexible or variable rate of interest. In floating interest rate, the rate of interest varies according to the market lending rate. Which means if market lending rate goes up your interest rate will increase accordingly and vice versa. Because of the risk of fluctuation attached these interest rates are comparatively cheaper than the fixed interest rate.
Advantages Of Floating Interest Rates
- Floating Interest Rates are comparatively cheaper than fixed interest rates
Disadvantages Of Floating Interest Rates
- Market fluctuations directly impacts the floating rate of interest. Which can increase your EMI or loan tenure with the rise of market lending rates.
It is always advisable to take transparent floating interest on your loan. As there a market risk attached so your rate of interest which can increase or decrease your EMIs installments or loan tenure anytime with the change of general interest rate. In transparent floating rate of interest, financial institution passes the burden and benefits to the borrower with the change of market lending rate.
Partly Fixed & Partly Floating Rate Of Interest:
As name suggest these interest rates are partly fixed and partly floating. Some financial institutions offer this type of interest rates in which the total loan amount will be spit to apply fixed interest rate on one part and floating interest rate on the other. In other case they split the duration of the loan in which first few years the rate of interest will be fixed and after that the floating rate of interest will be charged on the loan amount. This type of interest rates are also known as fixed cum floating, fixed first, split rate and dual rate loans.
To attract customers some financial institutions offer low fixed rates ( teaser rates) for a short duration which get converted into retail prime lending rate later on.
Advantages Of Fixed-Cum-Floating Rate Of Interest
- Fixed Cum Floating Rates of Interest offers the combination of benefit of both fixed as well as variable/ floating interest rates.
This type of home loans are beneficial only when the interest rates are at a historical low rate and expected to rise in future. This is better option for the borrowers who have plans to pay off the entire loan in a short period of time before the variable rate get applied to the loan amount.