Floating Rate Home Loans are better than Fixed Rate Ones

The banking system in India permits borrowing of two kinds of loans. Fixed rate interest loans and floating rates interest loans. Recently, it has been observed that home buyers are inclined towards floating rate home loans, rather than fixed rate home loans. So, what makes these floating rate counterparts better than the fixed ones? How do these loans work? Do the EMIs for both the loans differ? How can they affect your monthly expense budget?

Fixed Interest Rate Loan:

The interest rate for these loans is fixed at the time of borrowing, and does not vary with the changing market conditions. Early EMI of this loan are used to cover up the interest while later EMIs are meant for covering the principal amount.

This loan is ideal for individuals who do not want their monthly budget to be disturbed by prevailing market conditions.

Floating Interest Rate Loan:

In this type of loan, the rate of interest is known to fluctuate according to the contemporary market conditions. The interest rate is calculated as the sum of fixed base rate and the floating factor. Generally, the base rate is expected to remain stable, while the floating factor varies with the condition of financial markets.

Differences:

Floating rates of interest are much lower than the fixed rates.  If a floating interest rate loan is available at 12%, then its fixed rate counterpart will be available at 15%. Even if tough market conditions arise, and the float rate is increased by 2.5%, still you will end up saving some money from your EMI amount. The rise in the floating rate is not fixed, and soon the rates will fall down back to original ones, or may be lower.

Floating rate interest loans help you to save money in the long run. Hence, they are becoming a favorite among home loan borrowers.