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UNDERSTANDING THE NUANCES OF HOME LOANS

The long term commitment associated with home loans is responsible for attaching so much importance to the issue. The tenure of loan can be anything between 10 to 30 years and one has to assess his own financial status as much correctly as possible so that it is possible to carry the loan throughout the tenure without any difficulties. To arrive at the decision, one has to consider the conditions of the money market, evaluate the trend of interest rates, weigh the options between fixed rate and variable rate of interest and above all re-payment capabilities. Inability to make timely payments can weigh down heavily in terms of added interest payment and could affect the credit rating.  To facilitate the decision making process it is important to have clarity about certain important aspects of availing the loan.

Fixed rate or variable rate?

Since home loans come with options of fixed rate interest and variable rate interest, the borrower has to decide his or her preference. On the face of it fixed rate is higher than the prevailing floating rate of interest at any point of time. Choosing fixed rate interest would mean that you agree to pay the rate of interest that prevails on the day of disbursement of loan throughout the tenure of loan regardless of the market rates of interest. For variable rate loans, the rate of interest keeps varying according to the overall market conditions that are linked to the economy. However, if the rates are lower today, it does not mean that it would continue dipping. On the contrary, it might take an upswing anytime and you should be ready to withstand the shock that could entail you to shell out more money.

When interest rises

When interest rate increases, for those who have availed home loans at floating rates, there are two options to choose from. Either to accept additional monthly payments without altering the tenure of loan or to increase the tenure of loan by keeping the monthly payments unaltered. This is a tricky situation, because accepting the first option might seem to burden you but at the same time it gives you the satisfaction that with each monthly payment you are nearing the completion period of debt payment. But exercising the second option would recede the debt repayment date  and if there is change in interest rate periodically, the repayment of debt would be considerably stretched that has the potential to entrap you in a vicious debt cycle.

Combating high interest

The high interest that you might have to bear can be mitigated by considering refinancing. There are many financing companies offering attractive mortgage rates and terms that can help you to generate savings by refinancing home loans. If you have a perfect credit history, you can easily avail refinancing and lower the monthly interest re-payments.

Choosing a home loan with the right mix of interest and repayment terms essentially requires some knowledge about the financial market and economic trends for which you can consult a professional for better insight.

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