Deciding Between Fixed Or Variable Interest Rates
Once you decide to take up a mortgage, the next thing that storms your brain is choosing between fixed and floating rate of interest. It is easy to get dumbfounded at this level if you are not financially trained.
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 recommend this.
Now ideally as it should be, we assume that once you select fixed rate plan for yourself the rate of interest will continue unchanged for the entire period you have fixed the interest rate for irrespective of any incidental increase in the same. But actually this is not always the case.
Here we demystify the nature of fixed interest rate housing loan transaction for you so that you can make an educated decision over the matter.
* Read the small print of your home loan document. You will find that the bank has the right to serve you thirty or sixty-days notice period that it intends to increase its interest 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 mortgage contract, you can spot clauses 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 adjustments in the interest rates on home loans they approve 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 home loan company you can save a lot of money over the life of your mortgage and in almost all cases the consulting cost is free.
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