Deciding Between Fixed Or Variable Interest Rates
Once you resolve to take up a home loan, the next thing that tempests your brain is choosing between fixed and floating rate of interest. It is easy to get stuck at this level if you are not financially educated.
If the media and banks are exclaiming about increased interest rates you make feel pressed to go and rush into fixing your home loan rates. Your bank or financial consultant may even suggest this.
Now ideally as it should be, we take for granted that once you select fixed rate plan for yourself the rate of interest will remain unchanged for the entire period you have fixed the interest rate for irrespective of any subsequent increase in the same. But actually this is not necessarily the situation.
Here we demystify the nature of fixed interest rate mortgage transaction for you so that you can make an educated conclusion over the subject.
* Check the small print of a loan. The bank has the right to give you 30 or 60-days notice that it intends to increase its rates.
* The bank’s first-year rates are binding on the bank only for that short period of 1 or 2 months. The 2nd-year home loan rates are not binding at all. Neither are the bank’s 3rd-year loan rates.
* Force Majeure Clause
So, while you read your home loan contract, you can spot statement like this:
“Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.”
This is called Force Majeure Clause that enables the bank to undertake appropriate changes in the interest rates on home loans they sanction to their borrowers.
So remember to look at refinancing every couple of years so that you do not pay too much. If you select a good mortgage broker company you can save a lot of money over the life of your housing loan and in most cases the consultation cost is free.
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