Opting for a home loan as a first time home buyer is easier said than done. Although banks appear eager to lend, the reality of loans might be tedious if you are not well researched into the intricacies of what affects home loan interest rates. Beyond learning your home loan eligibility, understanding interest rates is also a key element of research. Here are five things you need to know about home loan interest rates.
- Factors Affecting Your Interest Rate
Most people are aware that calculating loan eligibility can be done through a home loan EMI calculator which is widely available on many websites online. Installments are usually limited by banks to be about 40% to 50% of the home owner’s salary. If you have any pre-existing liabilities, your eligibility for a fresh home loan drops further. If your bank chooses to lend out a home loan to you, pre-existing liabilities might lead to a higher interest rate. Another criterion is the number of dependents in your family. The higher the number, the lower a bank assumes your ability to repay them back will be. Interest rates may be higher in this case.
- The Type of Loan Your Choose
Based on their interest rate, there are two types of home loan interest rates available on the market. These are fixed and floating loans. In a fixed rate loan, market fluctuations do not affect the interest rate. Fixed-rate interest loans are usually 1%–2.5% more than the interest on floating-rate loans. This is because a floating rate loan will change its interest rate based on the varying market conditions.
- Reading the Fine Print
Although a home loan agreement is legally binding, there may be devils hiding in the details of your policy document. One of the key things to watch out for is additional charges over and above your interest rate. These are often specified as add-on penalties or additional charges beyond interest. They can include costs like service charges, administrative charges, processing fees, and more. Penalties are often applied to the prepayment of loans. Keep a close comparison of these minor details when comparing lenders.
- Negotiating Your Interest Rate
If you are a first time home buyer, you might not know about negotiating your home loan interest rate. However, you can always negotiate your interest rate offered by your bank. This is particularly useful when you have a clean credit history and have a rapport with the bank you are borrowing from. A high credit score offers bargaining power. Use your haggling abilities to negotiate your interest rate as until and unless you have signed the home loan document, this rate is not binding
- The Longer the Tenure, the Costlier You’re Loan
Many home loan borrowers attempt to increase their loan tenure to reduce the burden of their monthly EMIs. This strategy seems good in the short term but hurts the borrower in the long term. Interest proves costlier than monthly EMIs. Ensure you keep your loan tenure as short as you can manage and pay your EMIs in full in a timely fashion. This boosts your credit score faster and prevents having to pay exorbitantly in interest and additional charges.