Having your own home is a dream of many. It comes in basic necessity and is also a huge investment. You might require to take a loan for this huge amount. In today’s era taking loans has become a simple process. A home loan is opted for buying a new flat/plot of land. It can also be taken to renovate the existing house or even repair the existing house.
We have different types of home loans provided by financial institutions
- Home Loan – It is the most basic type and many banks, finance company offers us this facility. The lender will legally keep the house until complete repayment is done.
- Home Construction Loan – It may be taken when you already own a plot of land fit for construction purposes
- Home Extention Loan – As the name depicts when you already own a house but want to extend it by adding a floor or such.
- Home Improvement Loan– It consists of repairing and renovating the exciting house not rebuilding a new one. It includes painting, electrical circuit repairing, plumbing, etc
- Home Loan Balance Transfer – This feature enables us to transfer the home loan balance which is yet to be procured to a different lender which offers it at a lower interest rate or better service
After knowing the above categories we might have a clear idea about what is a Home Loan by now. With proper guidance and knowledge, this can be done quickly and efficiently.
How to apply?
Due to the modernization of technology getting a Home Loan has become easier than ever before. We can enquire about home loans even on online portals and banks. After providing them with needed documents and after checking your credit score banks may decide to approve or reject. Due to advancements in technology even before going to banks, we can calculate our EMI estimate using an EMI calculator. It can be done by adding principle loan amount planning to borrow and duration.
Many financial institutions provide us with different loans which vary in their terms and conditions as shown in the table below. Some loans may be fixed rates and some may be variable rates. It depends on the purpose of taking loans. Variable-rate loans are based on the principle which changes the interest charged according to the present index of that time. On other hand, fixed-rate loans charge interest which is fixed for the whole tenure, no matter what changes occur in market rates. also called as Fixed mortgage rate (FMR). Once the interest repay rate has been locked it won’t fluctuate. It helps us to plan our finances accordingly beforehand.
|HDFC Bank||7.40 % p.a. to 8.20% p.a.|
|Axis Bank||12% p.a.|
|SBI BANK||6.8% p.a. to 7.15 % p.a.|
Theoretically, this may be the case but practically it is not. It may be seen that due to flickering changes in the market financial institutions may be reluctant to provide fixed-rate home loans till the end. It means they might set a fixed rate of interest for the initial few years but later you might need to repay these home loans to them according to preceding market rates. As we say, every coin has two sides so do fixed home loans.
Pros of Fixed Rate Home Loans.
- SAFE – These loans are preferred due to unpredictable market changes. These loans are a safer choice that won’t be affected due to changing conditions.
- FINANCIAL PLANNING – It helps us to manage our finances beforehand and have a future aspect regarding our expenses
- TRANSPARENCY – we won’t have to be in a state of dilemma about how much we need to pay or worry about what is happening in the market.
Cons of Fixed Rate Home Loans
- HIGH-INTEREST RATES – These loans already come with a 1-2% higher rate of interest than floating loans so lenders won’t suffer the loss of low market rates.
- MISSING OUT – Opting for such loans you will lose an opportunity of benefiting from dips in the market. Reserve bank of India may provide us with the facility to take a home loan with a low rate of interest to facilitate investments and we might miss out on it.
Pros of Floating Rate Home Loans
- LOW-INTEREST RATES – They are low as compared to fixed-rate home loans so borrowers can still save money by opting for this loan even tho it might get affected by market fluctuations.
- TEMPORARY MARKET CONDITIONS – It may be a case where due to an imbalance in market interest rates on these loans might touch the sky but we can still have hope because these conditions are temporary and won’t remain stable.
Cons of Floating Rate Home Loans
- FLUCTUATING MONTHLY INSTALLMENTS – you might gain from changing rates but it might become a mess as you won’t have a concrete idea about how much amount is to be paid next month as it will depend on market conditions.
- BUDGET DIFFICULT – As EMI becomes unpredictable so having financial discipline is not a case here. Sometimes you might end up paying more than what you planned for and raise the hardship.
Should you choose Fixed Rate Loans or Floating Rate Loans?
From the borrower’s perspective if you are planning to take the loan for a short period then going for a floating rate is preferable as you have the opportunity to start with low interest. It is to be kept in mind that the economic cycle might change and in the end course of time even after opting floating loan, you might end up paying rates that are equal to those of fixed rates. But you will still be in the win and win situation because fixed-rate loans provide a higher rate of interest for repayment from the start and continue till the end but hereafter opting for floating loans you at least had to repay low-interest rate for initial years.
Floating rate loans are affected by changes made by the Reserve bank of India in repo rates, reverse repo rates, bank rates. during these covid times, RBI is striving hard to revive our economy by adding investment. They are providing incentives in loan rates of housing loans which might be a golden opportunity to us only and only if we opt for floating-rate loans.
We might come under the illusion that fixed-rate loans are fixed till the end and we might save money by opting for this but in the end, you might be the one who is paying banks more to protect them from the risk of losing their margins. It is safe to play when dealing with short-term loans but when comes to long-term floating rate loans might come as a savior.