How to Choose the Right Type of Home Loan Based on Interest Rate

There are two types of Home Loan interest rates – fixed rate and floating rate home loans. While the interest rate for fixed rate loans remains constant throughout the tenure of the loan, the rates can increase or decrease for floating rate loans owing to external factors including but not limited to RBI’s repo rate policies.

In this article, we will guide you through the process of selecting the right type of home loan. We will also provide you with important property financing tips to help you make an informed decision. 

Types of Home Loans to Choose Based on Interest Rates 

There are primarily two types of home loan interest rates – fixed rate and floating rate home loan. 

• Fixed-Rate Home Loan: This type of loan offers a fixed interest rate throughout the loan tenure. It provides stability as your monthly payments remain constant, making budgeting easier. Banks usually charge a prepayment penalty fee for fixed rate home loan foreclosure.
• Adjustable-Rate Home Loan: Also known as a floating or variable rate loan, this type of loan has an interest rate that fluctuates based on bank and RBI’s policies. It often starts with a lower interest rate but can increase or decrease over time. Floating rate home loans don’t come with loan foreclosure fee.

Examples on How to Choose the Right Type Of Home Loans

Let's consider a few examples to understand how different factors can impact your home loan decision.

Example 1

Rohan is a salaried individual with a stable income. He wants the security of fixed monthly payments, so he opts for a fixed-rate home loan. This ensures that his EMI remains the same throughout the loan tenure, making it easier for him to plan his budget.

Example 2

Neha is self-employed and expects her income to increase in the future. She chooses an adjustable-rate home loan with a lower initial interest rate. As her income grows, she can handle any potential increase in EMIs.

Factors to Consider When Choosing the Right Type of Home Loan

Choosing the right type of home loan is crucial for ensuring that your financial commitments align with your needs and capabilities. Here’s a clear guide to help you make an informed decision.

1. Interest Rates

The interest rate is a crucial factor in determining the affordability of your home loan. Compare interest rates offered by different institutions and understand whether they are fixed or adjustable.

2. Loan Tenure

The repayment period of your loan will affect the total amount you repay over time. A longer tenure may result in lower monthly installments, but it also means paying more interest over the life of the loan.

3. Processing Fees and Other Charges

When applying for a home loan, be aware of any processing fees, administrative charges, or prepayment penalties associated with the loan. These additional costs can significantly impact the overall cost of borrowing.

4. Down Payment

Consider your savings and how much you can pay as a down payment for your home. A higher down payment can reduce your loan amount and lower monthly payments.

5. EMI Calculation

Calculate your Equated Monthly Installment (EMI) before finalising a loan. An online housing loan calculator can help you work out these details quickly. Knowing your EMI in advance allows you to plan your finances better and manage these monthly payments without any stress. You can use Ujjivan SFB’s Home Loan EMI Calculator to check your monthly repayment obligations.

Few Property Financing Tips to Keep in Mind 

Now that we have understood how to choose the right type of home loan, here are some essential property financing tips designed to help you navigate the real estate market effectively. 

1. Improve Your Credit Score

A higher credit score can significantly enhance your chances of loan approval and better interest rates. 

2. Save for a larger down payment

A larger down payment can lower your loan amount and lead to better loan terms and lower interest rates. 

3. Get pre-approved loan

Before house hunting, consider getting pre-approved for a loan. This helps you understand your budget and strengthens your negotiating position with sellers

4. Shop around

One of the other property financing tips is to compare offers from multiple lenders to find the best interest rates and terms. Use online comparison tools to simplify this process and don’t hesitate to negotiate with lenders

5. Understand loan terms

Familiarise yourself with different loan types—fixed-rate vs. floating-rate—and their implications on your monthly payments over time. Fixed-rate loans offer stability, while floating rates may start lower but can increase based on market conditions.