Buying your own house is undoubtedly exciting, but at the same time, also comes with great responsibilities as well. The process involves a series of decisions, which have a direct impact on your overall lifestyle and the effect could remain for years or even decades. Therefore, it is significant to have a thorough research before finalizing the home loan deal. And, as interest rates play a major role in overall budgeting, it is important to gain an understanding upon what methods are being used for calculating the home loan interest amount. Interest rate calculation method has a direct impact on entire financial management and thus, it is essential to choose the method precisely.
What are interest rate methods?
Basically, banks and other housing finance companies calculate home loan interest using fixed or floating method. As buying home is a major financial decision, it’s important to gain significant understanding of both the methods.
As the name suggests, in fixed rate loan, the interest rate remains fixed for the entire home loan tenure. Opting for a fixed interest rate gives you a sense of stability since you know how much exactly you’ll paying towards home loan EMI every month. The amount of monthly EMIs remains the same throughout the tenure, which allows you to plan your budget accurately.
However, the only drawback of fixed loan rate is that the interest rates are comparatively higher than floating rates. And even if the market drops, you’ll have to pay the interest at par rates, which will ultimately put a hole in your pockets.
On the other hand, floating home loan rates are subject to market scenario and thus, are highly volatile. This is the reason why the interest rates keep on changing throughout the loan tenure as per market conditions. Also referred as floating interest rates, these are calculated on the basis of base rate offered by several banks and housing finance companies. Therefore, whenever there are any changes in the base rate, the home loan interest rate also gets revised as per the market trends.
Advantage of floating home loan interest rates is that the rates are comparatively lower than the fixed loan rates. Even if the floating interest rate goes higher than the fixed loan rate, it will be only for a short interval. Therefore, it can be said that even the amount of interest might vary for the entire tenure, but at the end, you’ll definitely be saving some pennies in long term. Floating interest rates undoubtedly brings a lot of savings.