subject: Fixed or Floating rate home loan: Which is Better? [print this page] Fixed or Floating rate home loan: Which is Better?
One of the common questions for any loan seeker, whether to choose a fixed rate home loan or a floating rate home loan. Let's understand both types of interest rate home loans.
To know more on fixed rate home loan, read "Fixed rate home loan"
To know more on floating rate home loan, read "Floating rate home loan"
Which is better Fixed rate home loan or floating rate home loan?
Should a borrower opt for a fixed rate home loan or a floating rate home loan is a matter of personal decision which has to be taken by the borrower. Before you decide which rate of interest to go for, understand the state of economy.
What is State of the economy
State of the economy means is the country is into inflation or deflation. For example Japan is a deflation economy and India is an Inflation economy. It is always advisable to opt for a floating rate home loan for a deflation country and a fixed rate home loan in case of inflation economy.
Current scenario of the economy
If you believe that interest rates are slated to drop in the future, then you can opt for a flaoting rate loan. That way, you benefit when the rates fall. Or, you could even take the fixed option for a few years and the flexible option later. But, if you opt for a floating loan, you must also have an appetite for risk and be able to take it in your stride when rates rise.
Let's understand what are the solutions available in case you opt for one type of loan
Floating rate home loan Solution
Let's say you opt for a floating interest rate loan. If interest rate rises, the borrower has two options.
Option 1 Increase the EMI keeping the tenure of the loan constant
Or
Option 2 Keep the EMI constant and increase the tenure of the loan.
If you have the appetite for risk and are financially comfortable with a higher monthly payment or a longer tenure, go for a floating rate home loan.
