A property is generally seen as one of the biggest purchase or investment that a person does in his lifetime. To buy a house, people generally have to depend on different financing institutes to make their investment more manageable. Banks and other lending institutes offer different type of financing options that can help them to cover a major portion of the property cost and a person can easily avail loan which can be repaid in easy monthly installments. The most common loan type are- floating and fixed rate and this article deal with the different that separates these two financing options.
Fixed rate of interest
In this type of loan, a person is required to repay the money in equal monthly installments which remains equal for the loan period. In other words, this means that the borrower is required to pay a fixed amount of amount every month for a set time period that has been chosen by him. The rate of interest generally depends upon the money which is being borrowed, market situation and the period of lending.
Being fixed, it provides a sense of certainty and comfort to the borrower. This option shields the person who has borrowed money from the changing interest rates and market condition and allow them to pay a fixed amount on which both the parties have agreed. This is an ideal option for all those individuals who do not want to make any change in their financial plan.
Floating rate of interest
Periodic change in rate of interest is seen by all those borrowers, who have opted for floating interest rate. Different factors such as economic conditions, inflation rate, reserve bank of India measures and liquidity influence the interest rate. This rate of interest causes changes in the monthly installments which may sometimes decrease and can also increase.
The reason why people prefer this type over the other is that it is 1-2.5% cheaper than its counterpart. For example when the fixed interest rate can be secured at 13%, floating rate of interest is available at 11%. Moreover when the rates falls, borrowers is the one who can gain significantly from the condition, he can also choose to reduce the repayment period however the repayment amount remains the same.
So when it comes to making a choice, there are some important factors that should be kept in mind. Few of them are:
Monthly income: If you are on strict budget, it is always better to opt for fixed rate because in this type everything is already decided. However if there is some space and you can afford extra expenses, choosing the other type would be the right choice.
Current rates: Evaluate the market before making any decision. Fixed rate can be chosen if the present interest rates are low however if there is a possibility that the rate may experience a decrease in the future try reconsidering your decision. Whatever your choice may be, choose the loan type depending upon your requirements.
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