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Home Loans - Fixed rates loans, Fixed rates loans, Teaser rate loans

 

 

Here's a quick start guide on how to distinguish fixed, floating and teaser rate loans from one another

 

BUYING a house is one of the biggest investment decisions for most people. According to industry estimates, almost 90% of the home buyers opt for a housing loan.


   There are three broad categories of home loans available today. The floating rate loan is the most popular option among borrowers. Floating rates are interest rates which keep changing according to the changes in the benchmark rate referred to as the base rate now. It is priced as a certain percentage above or below the benchmark rate. Whenever the base rate increases, a borrower has an option to either increase his EMI or increase the tenure by keeping the EMI constant. Floating rates gained ground in early 2000 when interest rates almost halved on loans.

   Fixed rates, which are relatively constant, can also change in line with the benchmark rate. There are two variants in a fixed rate: pure fixed rate and fixed rate linked to money market conditions (MMC). A fixed rate loan works well when the economy is witnessing a low rate cycle and it's exactly the reverse for floating rate loans. But it is difficult for a borrower to take such calls as interest rates are highly dynamic in nature. The fixed rate linked to money market conditions has a reset clause which allows the bank to adjust the interest rate once in 3 or 5 years, depending upon the bank.

   Pure fixed rates are most expensive, given their stable nature. They are at least 2% or higher than fixed rates linked to MMC. Fixed rates linked to MMC are at least 2% higher compared with a floating rate loan.

   Teaser rate loans at 8% are the latest entrants in the market. These hybrid loans are fixed for a certain period and then transform into floating loans. SBI, ICICI and HDFC are some of the banks tha are offering loans such loans

 

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