The Tale of Two Rates: Floating Rates and Fixed Rates

Tale of Two Rates

Purchasing a house has, is and will always be an expensive affair. With the emergence of loans, it has become relatively easier and less burdensome to purchase a house. When you take a loan from the bank to buy your dream house, you have to choose an interest rate you would prefer to go with while paying the loan amount. There are 2 interest rates that are available. Fixed interest rates and floating interest rates. Before we decide which one is better let us understand what these rates essentially are.

Fixed Interest Rates: As the name suggests, this type of interest rate remains fixed either for the entire term or a part of the term irrespective of the market interest rates.

Floating Interest Rates: The floating interest rate is linked to the market interest rates. If the market interest rate increases, the floating interest rate also increases and vice-versa.

Both the rates have their own advantages and should be opted for based on their own merits.

Fixed Interest Rates

1). When the market interest rates are predicted to rise in the future, you must go with the fixed interest rate home loan. The interest rate will remain fixed and you will save on the difference.

2). This rate creates an advantage for people who want a fixed monthly expense and don’t want to take any risks attached to their home loan repayment incase the market interest rate increases.

3). However if the rates are expected to fall in the future, you mustn’t go with fixed interest rate. This is because you will be paying the same rate of interest, when the market interest rates fall.

Floating Interest Rates

1). When the market interest rates are predicted to fall in the near future, you must go with the floating interest rate home loan. When the market interest rates fall, so does the floating interest rate, enabling you to spend less and save more.

2). However this rate is variable and fluctuates from time to time. This could be risky for borrowers with a fixed income, incase the floating interest rate increases, creating an unpredictable high monthly expense.

Which one to go for?

After having understood what these rates are, let us look at which one is more advisable. Before we pick one of the interest rates, it is imperative to compare the interest rates (both floating and fixed) offered by the different banks. A larger chunk of the borrowers prefer the floating interest rate because they are very optimistic about the market conditions and interest rates decreasing in the future. Also if the market rates increase, they are sure to fall sooner or later. Again what type of interest to go for depends on the borrowers capacity to repay, the risk he is willing to take and the economy of the market.

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