The word “home loan” is often used as a key to open the door to one’s ideal dream home. There are many moving parts in the process of making this kind of significant financial investment, and the interest rate associated with the home loan is one of them.
What is the Role of Interest Rates in Home Loan?
The interest rate you pay on a home loan impacts how much interest you are going to pay throughout the loan. When considering a home loan, one must choose between fixed and floating interest rates.
- Fixed Rate of Interest: Throughout the term of the loan, the interest is fixed at a fixed rate. This gives borrowers a stable and predictable monthly payment schedule.
- Floating Rate of Interest: A floating or adjustable rate is dependent on a benchmark, like the Marginal Cost of Funds-Based Lending Rate (MCLR) or the repo rate of the Reserve Bank of India (RBI). As a result, your monthly payments, along with the interest rate, can fluctuate when these benchmarks change.
Understanding the Factors that Impact Your Home Loan Interest Rates
- Credit Score: Your credit score indicates your creditworthiness to the lender and assists them in determining whether you are a responsible borrower or not. Hence, having a strong credit score is a proven method to get cheaper home loan rates. Why, you ask? Because it allows you to bargain with the bank or lender depending on your creditworthiness. So, always make sure you have a good credit score by making timely payments and keeping a check on your outstanding bills.
- Loan Tenure: A shorter loan period can result in a lower interest rate, whereas a longer loan tenure can result in a higher interest rate. Furthermore, the size of your loan can also affect the interest rate, as some banks charge a higher interest rate on larger loans because they pose a greater risk to the lender. As a result, making a significant down payment is a prudent strategy to lower home loan rates.
- Type of Interest: The decision between fixed and floating interest rates is based on your tolerance for risk and your capacity to cope with any changes in your monthly payment schedule. Lenders typically demand high-interest rates since it is viewed as a potential risk.
- EMI: The Equated Monthly Instalment (EMI) of your loan is the financial heartbeat of your home loan adventure — it is the monthly payment you make to repay the debt. The interest rate has a considerable impact on the EMI, with lower rates resulting in cheaper EMIs and vice versa. Understanding how interest rates affect your EMI is, therefore, critical for planning your spending habits for the month and ensuring a smooth financial journey.
- Location and Worth: Another important aspect in deciding your interest rates is the worth and location of your home. The property’s resale value would be lower if it were built poorly, had few amenities, or was situated in a discreet community. Due to this, the lender might impose a high rate of interest on your home loan.
- Job Profile: A reliable source of income and employment can work wonders for your loan application. This is because the lender views you as a high-risk loan applicant if your income is inconsistent. Therefore, you can be eligible for lower rates of interest on your home loan if you work as a government employee, a doctor, a chartered accountant, or another type of salaried professional.
- Additional External Factors: Interest rates fluctuate according to the needs of the market. Several factors, including the state of the economy, inflation, and Central Bank Policy, influence interest rate fluctuations. As a potential homeowner, keeping a watch on these external factors can help you prepare for future changes in interest rates and help you make sound decisions.
- LTV: The portion of the property value that can be funded with a loan is known as the loan-to-value (LTV). Due to the increased credit risk, a larger loan amount carries a higher interest rate. Making a bigger down payment can help reduce the loan amount, which in turn will lower the interest rate.
Why should you Borrow a Home Loan from Tata Capital?
Owing to its long history and dedication to financial inclusion, Tata Capital has become the preferred choice for those starting their homeownership journey. Tata Capital offers you a variety of home loan options with a long list of advantages, including:
- Reasonably low-interest rates
- Easy documentation
- Transparent processing; no additional fees
- Home extension loan
So why second-guess yourself? Check out their website to apply for a home loan online today!
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