Home loan seekers usually face a dilemma of whether to opt for fixed rates or floating rates. This is mainly because many of them do not know the exact nature of differentiation between fixed rates and floating rates. There are some fundamental differences between the various rates on offer that individuals must appreciate before opting for a home loan.

To begin with, there are two basic types of home loans based on the interest rate - fixed rates and floating rates. Within the two broad categories exist sub-categories. The differentiation amongst the sub-categories has been outlined below:

1. Fixed rates
Fixed rate home loans are loans available with a fixed rate of interest for a given period of time. There are two basic types of fixed rate loans:

a) Fixed rate (fixed for 3 years)
Here, the rate of interest is fixed for the initial three years after which it is subject to review. At the end of the 3 -year period, the interest rate could be aligned with the prevalent interest rates at that point in time.

b) Fixed rate (fixed for 5 years)
This type of interest rate differs from the 3-year fixed rates only in one aspect; the time period after which the interest rate is reviewed. Here, the time period for a review is five years. The 5-year fixed rates are also ‘costlier’ as compared to 3-year fixed rates by around 0.25%-0.50%.

2. ‘Pure’ fixed rates
The interest rates under a pure fixed rate loan are fixed throughout the tenure. In other words, interest rates do not fluctuate with a change in the market rates. This is unlike the regular fixed rates (fixed for 3-5 years) or floating rates where the rates are brought up for review periodically. It is also because of this reason that the pure fixed rate loans are costlier as compared to their counterparts. For example, a certain HFC charges an interest rate of 10.50% on its pure fixed rate loans, which is 0.25% higher as compared to its regular fixed rate loans.

However, keeping in mind the interest rate fluctuations in recent times, not many housing finance companies (HFCs) offer pure fixed rates on their home loans.

3. Floating rates
Floating rate home loans are linked to the prevailing market rate of interest. Floating rate loans are therefore subject to change at periodical intervals. Typically, a floating rate is brought up for review once every quarter. However, the time period can differ across HFCs. For example, a certain HFC has a rate review annually (subject to changes in the prime lending rate).

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This entry was posted on Wednesday, May 31st, 2006 at 10:27 am and is filed under Home Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.