If you are like most people, you must be looking for a lender that offers the lowest home loan interest rates. But how is the interest rate determined? The answer can be challenging to figure out, even for seasoned home buyers. Knowing what impacts the interest rates can help you better prepare for negotiating your home loan and for the overall home-buying process.
Even saving a fraction of a per cent on the interest rate can save you a lot over the life of your housing loan, so it definitely pays to prepare, compare offers, and shop around. Here are some key factors that affect your interest rates.
Lenders use your credit score to check your creditworthiness. In simpler terms, it defines your capability to repay the loan. Having a good credit score allows you to negotiate for a lower home loan interest rate. On the other hand, having a low score will ultimately lead to high-interest rates. The best way to keep your score healthy is to make timely repayments on any existing loans, keep a check on your debts, don’t withdraw cash using your credit card, and be rational with any new loans for credit.
In general, a larger down payment translates to a lower interest rate. The reason behind this is when you pledge a higher lump sum amount, you have a higher stake in the property, and hence lenders see a lower risk. Along with the lender being assured, a higher down payment would also significantly reduce your EMI amount.
Another critical factor that determines the interest rate is the location of the property. For a property located in an isolated and remote area, where the infrastructure and connectivity are poor, you may be charged a higher interest as compared to an urban property in a well-connected location with good amenities. The same also applies to the age of the property. If the property has stood its ground for a long time, lenders may deem it risky and charge higher interest.
Type of interest rate
The type of interest rate you choose also determines the overall interest rate. You can opt for a fixed interest rate loan or a floating interest rate loan. The EMIs for fixed interest rate loan stays stable for the entire loan period while floating interest rates vary periodically during the loan tenure.
The tenure is the duration in which you must to repay the loan. A longer home loan tenure means that the EMI amount will be lower, but the overall interest amount paid over the years will be high. The total amount paid in interest will be on the lower side if you opt for a short term loan. However, your monthly instalments will be significantly higher.
As we see, various factors affect the home loan interest rates that lenders charge. Many subtle differences in these factors make some housing loan plans more attractive than others. To get the best, it is advisable to ensure that all these factors – both external and internal– are in your favour.