Home Loans: A lot goes into finalising your dream home. We’re not only talking about the design of your home, the location and amenities but also the financial means. You may want to buy it from your savings or take a home loan instead.
Let’s say you decide the latter: you decide to avail a home loan to fund your dream house. But the decision doesn’t end here. A home loan is not only a usual day-to-day procedure that can begin without enough consideration. It involves making a hundred decisions – from choosing the right lender to deciding if you want to go with a fixed interest rate or adjustable interest rate.
Choosing between the two is an important decision as it decides the final cost of the home loan for you, including interest. This blog will help you decide the right option for you.
What is a Fixed Rate and Adjustable-rate Home Loan?
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You may know that whenever you are taking any kind of loan, you are supposed to pay interest on it for a pre-determined period. This is determined by the ongoing interest rate.
As the name gives it away, the fixed interest rate doesn’t change with time and remains the same throughout the tenure of the loan. As for an adjustable-rate home loan, the interest rate keeps fluctuating from time to time, and this fluctuation depends on the market condition.
If you want to avail a home loan, you must choose between the two. Some lenders, however, provide you with a mix of both. In other words, you can choose to pay a fixed interest for a pre-determined period, and then pay interest as per the market condition.
Which is Better? A Fixed-Rate Home Loan or Adjustable-Rate Home Loan?
Most people may want to go with a fixed-rate home loan, assuming that it will be cheaper and they wouldn’t need to pay any additional money if the market interest rate increases. But that is not always how it works.
Firstly, fixed-rate home loans are often more expensive than adjustable home loans. Secondly, it’s not essential that the market interest rate will always increase. Sometimes, it comes down as well, enabling borrowers to save money on interest. Again, this doesn’t mean that adjustable-rate home loans are always better.
Unfortunately, there is no one answer. If a fixed-rate home loan turned out convenient for your friend, it may not be convenient for you. After all, it all comes down to the market condition and your financial preferences.
Let’s help you decide by providing you with a pros and cons list.
Fixed-interest Home Loan
Advantages
If you are somebody who prefers creating budgets every month or year, a fixed-interest home loan may be better for you. You will be required to pay the same interest amount every year, as decided, throughout the tenure of the loan. This will offer you stability and a predictable monthly payment amount.
Consequently, you can prepare your budget and map out your financial future without any uncertainty or unpredictability. Moreover, you will rest assured knowing that your EMIs won’t increase even if the market rate increases over the years.
Disadvantages
The one major disadvantage of fixed interest home loan is that it can be expensive. A fixed interest rate is generally capped higher than an adjustable-rate home loan. This means, you will have to pay a high-interest rate from the very start, which may not be affordable for people with limited income and those who are just at the beginning of their careers.
In addition to that, you must note that the market interest rate also decreases. In this case, you will not be able to save up on interest if the market interest rate drops in the future.
Adjustable-Rate Home Loan
Advantages
An adjustable-rate home loan comes with a lower interest rate, which may be ideal for those who are not financially strong currently but are sure that they will be in the future. They may also be benefitted financially if the interest rate drops in the future.
Disadvantages
One of the major drawbacks of an adjustable-rate home loan is the uncertainty and unpredictability it brings with it. As you wouldn’t be able to calculate your monthly instalments in years to come, you may find it challenging to plan your budget. In case the interest rate rises in the future, home loans can become expensive too.
Take Your Pick Wisely
As we have already mentioned, there is no one answer. Choosing the type of home loan ultimately comes down to your preferences, financial condition, market analysis skills and risk tolerance. If you prefer certainty and predictability over everything else, a fixed-rate home loan may be the better option.
If you are still confused, reach out to a reliable partner for guidance and help. Tata Capital can be a good option here. Visit their website to know more.
