Best Ways to Reduce Housing Loan Interest Payments
Home loans are the most accessible ways to purchase the dream home you have been eyeing for a long time. Yet, for some people, the process of applying for a housing loan seems intimidating and overwhelming. That's where the home loan interest rate comes into the picture. Understanding interest rate types is crucial as this can significantly affect how much you pay for your home loan. So, why should you opt for a floating interest rate for your housing loan? This article will give you some compelling reasons.
What Is a Floating Interest Rate on a Home Loan?
A floating interest rate, also known as an adjustable interest rate, is a type of interest rate that is not predetermined. This means that the interest rate varies as per market trends and Reserve Bank of India (RBI) policy changes. Hence, your monthly installments also fluctuate.
On the other hand, a fixed interest rate is an interest rate that remains constant throughout the loan term. This means that your monthly payments, including interest and principal, are always the same, regardless of market conditions.
Why Should You Opt for a Floating Interest Rate on Your Home Loan?
1. Lower Starting Interest Rates
Floating interest rates on home loans generally begin with lower interest rates because they are linked to the current market conditions. Lenders usually offer floating interest rates with a margin of around 1%-2% over the existing base rate linked to the RBI policy. This results in lower EMIs as the interest component is reduced compared to a fixed interest rate.
2. Flexibility
Flexibility is a vital aspect of choosing a home loan with a floating interest rate. You enjoy the flexibility of paying more than your set EMI without prepayment penalties. This means that if you have a surplus in any month, you can use that amount to reduce the principal, leading to a reduced interest burden in the long run. You can also opt for part payments during sudden bonus or surplus gains.
3. Interest Rate Fluctuations
As opposed to fixed interest rates, floating interest rates are variable. That means that they can fluctuate up or down depending on market conditions and RBI policy changes. If interest rates fall, your EMI payments may reduce or remain the same, and vice versa when the rates go up, which ensures that your interest rates are always in line with the market conditions.
4. Shorter Loan Tenure
Floating interest rates can help you to pay off your home loan faster. When interest rates decrease, your EMI remains constant, but the principal component in your EMI increases. Since your principal amount is increasing, your loan tenure will reduce, and you can clear your debt sooner than expected. This not only helps save money but also releases you from the financial obligations faster.
5. Budget Planning
With floating interest rates, budget planning becomes more manageable, as you can shift your payments from non-negotiable expenses in case of an increase in the interest rates. In contrast, with fixed interest rates, your EMI payment remains the same, even if other expenses have risen. Hence, a floating rate of interest offers added flexibility to manage your monthly expenses.
EMI Calculator: A Crucial Tool
Before opting for a floating interest rate, it is essential to analyze the loan cost carefully. To manage your EMI and to know how much interest you will have to pay throughout the loan tenure, make use of an EMI calculator. The home loan emi calculator uses an algorithm to calculate the interest, EMI, and principal components of your loan. It gives you an estimated EMI payment that you need to make to pay off your debt. This will help you streamline your budget and plan your finances accordingly.
Tips on Managing Home Loan EMIs
Here are some tips on managing your loan EMIs while opting for a floating interest rate.
1. Save Wisely
Saving little by little never goes in vain. It's always better to save even a few hundred rupees rather than not saving at all. It is recommended to save at least three to six months of your monthly income in an emergency fund. This fund can be used in case you face a cash crunch or for a sudden job loss, or if you need to cover the extra expenses.
2. Prepay Your Loan
Prepayment of home loans can significantly lower the burden of interest and reduce your loan term. So, if you're faced with additional earnings, or an unexpected return on investment, use that amount to repay the principal and repay the loan faster.
3. Compare Lenders
You should compare the loan offers of various banks before settling for the best deal. Comparing lenders will help you compare multiple parameters such as interest rates, processing fees, prepayment charges, foreclosure charges, and other hidden costs. This way, you can make a more informed decision that is customized to your needs.
Conclusion
In conclusion, opting for a floating interest rate on your housing loan provides added benefits such as flexibility, budget planning and, most importantly, lower starting interest rates. The loan term can also be reduced if interest rates go down, and you can pay off your loan debt faster. Nonetheless, always keep in mind that floating interest rates can fluctuate and make budget planning more complicated. It is necessary to take into account factors such as EMI calculation and comparison of lenders before settling on a decision that is ideal for your requirements.