Purchasing a home appears to be the ultimate dream for majority of individuals. Most people utilize a home loan since it is difficult to come up with the significant sum of money needed to buy a house. A home loan allows people to purchase the house of their dreams, but there’s more to it. A person needs to have a comprehensive knowledge of home loan interest rate. In addition to that, knowing how to optimize EMI payments act as a cherry on the cake. Having the right understanding of both of these is crucial to sound financial management.
The ABCs of Home Loan Interest Rates
It is crucial to know that there are two types of interest rates. Also, several factors affect the interest rates offered to you.
Types of interest rates in home loan
- Fixed Interest Rate – As the name suggests, a fixed interest rate remains even throughout the tenure of the loan. This system offers stability and predictability in your financial planning since your EMI payments will remain constant throughout your repayment period. On the other hand, you might lose out on a lot if the standard lending rates decline, as you won’t be able to benefit from the same.
- Floating (Variable) Interest Rate – Depending upon various economic factors and the prevailing market conditions, a floating interest rate keeps altering. This type of system allows you to capitalize on the falling interest rates. A flaw of floating interest rates is that if the standard rates increase, your EMI will increase too.
Fixed interest rates and Floating interest rates are the two types of home loan interest rate. Now, we will throw some light on the factors that impact the interest rates offered to you.
- Credit Score – A decent credit score will give you a bang for your buck when you take that home loan. Credit score simply tells about your past financial record and credit history. You will have a high credit score if you have paid your credit card bills and EMIs on time. As an example, a credit score of more than 750 is usually considered good in the eyes of the lenders.
- Economic Conditions – Another significant factor affecting the home loan interest rate is the prevailing economic conditions. These include monetary policies which the central bank regulates, and the inflation rates.
- Amount of Loan and Tenure – The amount borrowed and the loan’s time period can greatly impact the interest rate offered by the lender. Usually, smaller loans will have lower interest rates; similarly, shorter tenures may attract lower rates. This is because smaller loans and shorter tenures imply a lower risk for the lender.
- Type of interest rate – As explained earlier, the type of interest rate you opt for will also impact the amount you end up paying.
How can one optimize EMI payments?
While every other person is burdened with their EMI payments, optimizing the same is an art known to few. Knowing how to optimize your EMI payments can help you manage your finances to save more eventually. Some lesser-known strategies to help you optimize your EMIs are discussed below.
- Make prepayments – Whenever you have extra cash, try to make prepayments for your home loan. This small but significant habit helps you reduce the unpaid principal. Eventually, this leads to lower interest payments in the long run.
- Make a Larger Down Payment – When you do this, you reduce your overall principal amount. This ultimately reduces the amount of interest paid over the tenure of the loan.
- Balance transfer – You will often come across a different lender offering interest rates. In such cases, your best bet is to request a balance transfer to help you abate the interest costs.
- Use a housing loan emi calculator – This calculator helps you compare offers from various financial institutions to actually choose the best one for you.
You can make your home loan journey easier by gaining a thorough knowledge of home loan interest rates and understanding how to optimize your EMI payments. Always maintain a decent credit score and choose the right interest rate to set yourself up for success.