Everything You Need Know About Home Loans

Everything You Need Know About Home Loans

It is a dream come true for many to buy their own home and a majority of people opt for home loans to fulfil their lifelong desire. Home loans aren’t as simple as it sounds and if you are taking a loan for the first time, then there are certain things that you should know before taking the plunge.

The type of interest you opt:

There are two types of interest rates offered for home loans: one is the fixed interest rate and the other one is the floating interest. Floating interest means that the rate of interest is subjected to change over a period of time; it may either increase or decrease. By fixed interest rates, banks fix a rate of interest for the entire tenure of the loan repayment and under no circumstance, it is subjected to change. Usually, fixed interest rates are much higher than floating interests and therefore many prefer floating interest as they consider the current interest and compare the EMI they will have to pay in the start.

In floating interest rates, there is a base rate of interest set, above which the banks will add a percentage of margin spread which amounts to the total rate of interest. The base rates will be reviewed by the banks at each quarter and floating interest rates may go up or down depending on it. Though the base rates may be altered, the margin spread over it when once fixed can’t be altered for old customers but the margin spread can be changed for new customers. 

If you want to manage the changing interest rates and if you find any other bank offering lower interest, then you can shift to that bank with a less or no processing fee. Else, you can even opt for a lower interest rate scheme in the current bank and pay interest lesser than what you are currently paying.

The fine line in the fixed interest:

While preferring for a fixed interest rate, it is important to read through all the documents. Generally, fixed interest rate, as the name implies, shouldn’t have any provisions to change the interest at any point in the middle of the loan repayment. But some lenders may include a fine clause in the document that says that the interest is subjected to change during certain conditions that may result in the loss of money, especially during the times when the floating interest rate has exceeded the fixed interest rate. Therefore, make sure to read your documents thoroughly before signing them.

Repayment during the initial period:

It is best to repay more in the initial period of your loan as it will favour towards reducing the total amount you have to repay. If you repay the same amount after a few years, you will be paying more than what you will have to if you had paid 2 or 3 years earlier. This is because, in the first quarter, a lesser percentage of interest will go towards the principal but in the succeeding quarters, the interest towards the principal keeps on increasing and so will the amount you have to repay. Considering all your savings, you can try to pay as much as possible in the initial few years after you had taken the loan.