17 Jul 2015

Home Loans - Option -Fixed and Floating Rate

Whether to choose a fixed rate home loan or to choose a floating rate of interest that provides the benefits of decreased interest rate is a valid question by  home loan seekers. Here we take a look at the benefits and drawbacks of both the fixed and floating rate home loans.While Fixed rate of interest on Housing Loan is never fixed due to RESET CLAUSE, even then fixed rate is better than Floating rates.
Home Loans with Fixed Rate of Interest:
As the name indicates, Public is under the impression that fixed interest rate home loans allow the repayment in fixed equal monthly instalments over the entire period of the loan. The interest rates in such a case is fixed and doesn't change with market fluctuations. But it is not so as there is always a RESET CLAUSE and have a look at the home loan documents - read the fine print in documents lest you feel cheated afterwards. Despite the above facts ,looking into the economic scenario, Fixed Rate is better than the Floating Rate option.

Drawbacks of Fixed Option :The major drawback with fixed rate is that it is usually higher than the floating rate . Secondly, if for any reason the interest rate decreases, the fixed rate home loan doesn't get the benefit of reduced rates and. Another area of concern is whether the fixed rate home loan is 'truly fixed' or "fixed for just few years due to Reset Clause". This has to be ascertained while taking the home loan. A 'fixed' home loan, which can be changed every few years will definitely wipe out the very spirit of such a loan. Experts agree on the fact the fixed rate are a better option if the economic scenario promises a rise in interest rates in near future.

Home Loans with Floating Rate of Interest:
The biggest benefit with floating rate home loans is that they are at cheaper than fixed interest rates. However if the interest rates increases, as in the current economic scenario it is difficult to keep the interest rates low , the housing loan will put an extra load on the public.

CONCLUSION :In the present Indian scenario, when interest rates are volatile, with no clear cut indication as to the direction of future movement of interest rates, fixed rate loans are best, considering the certainty in them. Even then the most important is availing the Housing Loan when interest rates are low. Banks also provide for conversion from Fixed to Floating and Vice Verse but COST OF EXERCISING THIS OPTION IS VERY HIGH, sometimes 1% of the outstanding Housing Loan.

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