Fixed v/s Floating rate of Interest on Home Loan

Getting a home loan is very easy now a days, however choosing the best option is always a complex aspect. One should do a proper homework before rushing in to something. While applying for a home loan, the first thing which will bother the applicants is whether to go for Fixed Interest rate or Floating Interest rates?

Let us see which option is better.

Fixed Interest Rate on Home Loan

Fixed Interest Rate means repayment of home loans in Fixed Equal Installments over the entire period of loan. In this case the interest rate doesn’t change with Market fluctuations. During the early part of loan tenure the majority of monthly payments are used to service the interest and principal is served in the later parts of loan tenure.

Benefits of Fixed Rate home loan

  • Interest Rate remains fixed irrespective of Market Conditions.
  • A fixed rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule, which is easy to budget and doesn’t fluctuate.
  • It brings a sense of Certainty and Security.

Drawbacks of Fixed Rate home loan

The major drawback with fixed rate is that it is usually 1 – 2.5% more than the floating rate home loan. Secondly, if for any reason the interest rate decreases, the fixed rate home loan doesn’t get the benefit of reduced rates and the borrower has to repay the same amount every time. Another area of concern is whether the fixed rate home loan is ‘truly fixed’ or fixed for just few years. 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.