A home loan is a loan product which is provided by a financial institution to the individuals who want to purchase a home, but they do not have the finances for carrying out the purchase of a home. In a home loan, a financial institution will provide the customer with a loan amount for the purchase of a home.
Loan amount provided to the customers are provided at a certain interest rate. Repayment of a home loan is done through equated monthly instalments (EMIs). EMI repayments, customers would need to have to pay a specific amount every month for a tenure period until the complete loan amount has been repaid. There are two types of home loan interest rates, they are listed below:
Types of home loan interest rate:
- Floating interest rate:
A floating interest rate may go up or down as the interest rates in the market generally fluctuate. When a customer will opt for a floating interest rate, they will need to pay with the interest rate that is applicable in the market at that time. If the interest rate goes down, customers can potentially pay off their loan faster by keeping their repayments at the same level.
- Fixed interest rate:
A fixed interest rate doe not change during the tenure of the fixed rate which a customer chooses. When a customer opts for a fixed interest rate, they will need to pay a fixed amount for the tenure period until the complete amount has been repaid. At the end of fixed interest rate term, a customer can opt for a new rate which will be available at the time or go for the floating interest rate.
One of the most integral things with a home loan is the interest rate offered on the loan and there are some factors that affect the home loan interest rates and a customer should know about them before applying for a home loan. Knowing about these factors will be beneficial for the customer as way of getting good home loan interest rates.
4 factors that affect home loan interest rates are:
- Down payment:
A large down payment during the time of loan repayment will lead to a low interest rate, as financial institutions see a low risk when they make a large down payment and then pay off the remaining loan amount through monthly repayments. A large down payment is beneficial for getting good interest rates because these payments will provide the banks with a good sense of assurance about the repayment of the loan.
- Credit score:
An important factor that influences home loan interest rates is the credit score of the customer. A financial institution generally conducts a background research on the customers repayment history before providing the loan amount. Thus, it is advised that a customer should always maintain their credit history before opting for the home loan. A negative credit history may reflect negatively on the customer’s side and it may result in the customer getting high home loan interest rates.
- Type of interest rate:
The type of interest rate that a customer opts for also affect the interest rate. Customers can opt for either a fixed interest rate or a floating interest rate. A floating interest rate will vary periodically over the loan tenure, while the amount of repayment will not change over fixed interest rates.
- Loan tenure:
The loan tenure is the duration of loan where the customer will need to repay the loan. A short loan tenure means that the home loan interest rates are low and low overall costs, but the monthly repayment amount will be high. A long tenure will result in high interest payments but low monthly payments.