Rate of interest (ROI): Your rate of interest also depends on your selection of interest rate.
There are two types of interest rates:
1. Fixed interest rate- In fixed interest rate, there is no increase or reduction in your EMI, it remains the same for the entire tenure.
2. Floating interest rates- It changes in floating rate, in this your interest rate can increase or decrease.
Fixed interest rates: On a fixed rate loan, your EMI does not change for the entire loan tenure. In fixed rate, banks fix the interest rate of the loan at the beginning. This rate is applicable for the entire tenure of the loan. At the time of taking the loan, it is known that how much installment will you have to pay every month.
- Advantages- Fixed rate home loans can prove beneficial only if the Reserve Bank of India (RBI) hikes the repo rate in the coming years. You can save your money if the bank will hike their interest rates.
- Disadvantages- If RBI will announce to decrease rate of interest of all banks so, you will have pay your EMIs on your old and fixed interest rates and you will be not applicable to take advantages of the decrease interest rates.
Floating interest rates: In floating rate, the interest rate of your home loan is decided on the basis of the floating rate along with the base rate. In such a situation, the fluctuation of the base rate has an effect on the EMI.
- Advantages- This is beneficial when interest rates are expected to come down in the future. It can be too helpful in decreasing your monthly EMIs and save your money.
- Disadvantages- In the rare cases, if the standard rates will increase, then the loan will also increase and the borrower has pay his loan at a higher rate of interest.