Most homes in cities are expensive and hence the burden of home loans is huge. There are different options in home loans and a propective borrower should be familiar with the pros and cons of both.
Fixed and Floating
The mosy basic types of loans are fixed and floating. In a fixed rate loan, the rate of interest will not change, regardless of how the economy fares (pure fixed loan). Here a borrower knows what his interest rate is going to be. On the flip side, he has to pay a premium for this predictability in the form of a higher interest rate. Floating rate loans have interest rates that adjust periodically during the tenure. It is cheaper by a few points as compared to fixed. So a borrower starts with a lower interest rate than a regular fixed rate loan.
Some banks give loans for the purpose of purchasing land. The borrower can use it to construct a house or simply treat it as an investment.
Home Conversion Loan
Suppose a borrower has taken a loan and he later finds that there is a space crunch and wants to move to a larger home. The new home that he intends to purchase will cost more. A home conversion loan enables to transfer the existing home loan to a new account including the extra amount required. Hence, the need to prepay the earlier loan does not arise.
Home Improvement Loan
This facilitates all sorts of internal and external repairs and other structural improvements like painting, waterproofing, plumbing and electric works, tiling, flooring, and installing grill. If the borrower wants to extend his existing home, he must seek a home improvement loan.
Why Interest Rates Fluctuate?
The interest rates move up and down with a long tenure in case of floating rates. The average rate and tax incentive make it good for the borrower. The factors that influence interest rate movements are as follows:
Inflation pays a significant role in influencing the monetary policy of RBI. It forces the central bank to hike interest rates. The main reason for inflation are sharp increase in proces of basic commodities .
The liquidity in the system is another parameter that influences interest rate movements. Liquidity influences the cost of acquisition of funds for the banks. If liquidity is low, cost of raising funds will increase and they will need to increase the interest rates on their lending. There are many factors that influence the liquidity in the system. Fund inflows from foreign investors and a cut in the cash reserve ration (CRR) increase liquidity in the system and vice versa.