Are you sure about opting for fixed rate home loan scheme?

When it is comes to choosing between interest rate schemes a borrower has broadly two options to choose from- Fixed or Floating interest rate schemes, however it can sometimes be a bit difficult for a borrower to decide for the home loan scheme he must go for, as both of them have their own limitations, advantages and disadvantages.

As the name suggests that the interest rate under a fixed rate scheme is not variable, that means the interest rate will remain the same for the whole loan tenure no matter how disturbed the market rates be, he will have to keep paying according to the fixed rate.

The above mentioned is the basic contour of a loan borrowed under a fixed interest rate scheme but there are a lot many things that are encapsulated inside and that are very essential for a applicant to know before they have borrowed a loan.

The advantage with a fixed rate loan scheme is that the interest rate is fixed and such a scheme can prove to be a very useful one under the present market situation when the interest rates are constantly soaring. A borrower can then plan his loan very well as then he does not have to take any other factors into consideration and can keep making the repayments at the same rate.

As the interest rates have gone north, a number of modifications had been made applicable that makes it slightly more complicated from what it may look like. The first thing is that the interest rate that the lenders offer is way higher then the market rates as they have to keep it fixed and to make sure that they make considerable profit out of the deal they keep the interest rate pretty high.

Apart from that now most of the lenders have now started to hike even the fixed interest rate after a fixed interval of time that has made such loan scheme far too much expensive. The other disadvantage to this scheme is that it does not allow the borrower to enjoy the benefits of fall in the lending rates.

The borrower gets trapped inside the a bracket of interest rate and thus even when the lending rates are low, he will have to keep paying according to the higher rate applicable on his scheme. So, it is better if a person opts for floating interest rate scheme.

How much loan can you borrow?

A few people might wonder about the how does a lender decide the eligibility of a person, whether he can borrow or not and how much, these things are like puzzles for a majority of the people. Along with the lenders it is also very important for the borrowers to know about their loan eligibility.

The few things that the lenders are most concerned about is the credit report and the total fund inflow and the age of the applicant; with these factors they estimate the amount of loan that they can lend to him or actually whether they should lend loan to him or not.

To decide the loan eligibility of the applicant the lenders deduct his monthly expenses and then from the remaining amount it considers 40-50% that the lender can use to repay his loan and then on the basis of the years remaining before his retirement they decide the upper limit for the loan.

After that it is the credit history that is taken into consideration, a high credit score is evident if the credit-worthiness of the applicant and hence the lender can be bit optimistic about repayment of his lend amount in time by the borrower. If the credit score is not that good then it could also affect the chances for a borrower to receive the loan.

Few things to make prepayments more beneficial

A home loan is very much dependent on the interest rate applicable on it and as due to the continuous surge in the lending rates it has become one of the most prominent problems that the home loan borrowers are facing. In the present situation home loan prepayment can be of great use.

Under the prepayment facility a borrower can pay an additional sum of amount to bring the amount of monthly installments to be paid under control and by reducing the principal amount remaining. A borrower can make partial of full prepayments but a borrower needs to know that the lender can charge penalty if the amount of prepayment exceeds a certain fraction.

The good thing is that the according to the guidelines of The Reserve Bank of India, if a person id prepaying form his own sources, then a lender can not charge any thing extra from the borrower not even if he prepays the entire loan amount.

Generally when a borrower refinances his loan to another lender under such a condition his present lender can charge prepayment penalty. Prepayment penalty is implied on the loan amount due and can vary from lender to lender; generally it is high for the private sector lenders as compared to the public sector ones.

While making prepayments a borrower needs to be aware of a few things, the first thing is that he must try to negotiate as much as possible on the prepayments charges as generally they are not fixed and the other thing is that a borrower must calculate the sum of amount that he would be saving by making prepayment, that would include all the expenses associated with the loan as only then the calculation can yield some results that would help a borrower to opt for the most appropriate option.

If a person has borrower a few loans and if he wants to prepay the loan then he must go for the loans that is more expensive or that attracts high rate of interest.