Home loans are secured loans obtained to purchase a property or for home renovation. It helps you to finance your dream house without the need to worry about insufficient funds. Home loan are given in lump sum and repaid in equal monthly instalments (EMI). EMI helps you pay back the principal and interest divided equally throughout the lifetime of your loan so that it does not stress your budget.
However, Home loans can still be a very stressful financial decision if not purchased at the correct rate of interest rate. The interest rate on your home loans can significantly affect your financial health. For example- One of such factors is your credit score. Your credit score determines your capability to pay back the loan on time. If you have a good credit score, you will manage to receive a home loan at a relatively lower interest rate. Therefore, it becomes essential for you to know all the factors that can affect the rate of interest on your loan. For your convenience, we provide you with all such aspects below: numeric code that determines your creditworthiness to obtain a loan.
Credit score: Your credit score is a three-digit numeric code that determines your creditworthiness to the lender. Credit score ranges from 300 to 900, and a credit score of 750 or above is considered adequate. Having a good credit score is crucial as the lender might find you as a high-risk borrower and thus offer you the loan at a high-interest rate. To maintain a good credit score, you should frequently check your credit score, pay your dues on time and not take unnecessary loans, increasing the burden when you don’t need it.
Loan tenure: Tenure of loan implies the period from the date of approval of the loan to the date of last payment of EMI. Generally, the longer the loan tenure, the more would be your net interest rate. If you take a home loan for a longer period, your EMI would be low, but the interest rate would increase. Shorter tenure would help you secure a home loan at a lower interest rate.
Loan amount: Like loan tenure, the loan amount is yet another crucial criterion to determine the rate of interest you might receive on your loan. The larger the borrowed amount, the more the interest rate on the loan. It is advisable to pay a certain percentage of your property as a down payment. A larger loan amount increases the credit risk for the lender; thus, lenders, in turn, increase the interest rate on loan. Making large down payments also help decrease per month instalments, thus decreasing the loan burden.
Property resale value: If your property is close to metro cities or a place of proper connectivity with the city, the lender would consider it less risky than property at some remote area with poor connectivity and inadequate infrastructure. Therefore, before finalizing the property’s location, keep in mind this factor.
Job security: Your job stability also determines the interest rate on a loan. Generally, lenders consider salaried individuals as less risky than an entrepreneur with no confirmed source of earnings. Lenders consider a job at a reputed company or well-dignified position less risky. If you have a well-secured job, you might get a home loan at less interest rate.
Type of interest rate: the interest rate on loan can be of two types: the fixed and floating interest rate. The interest rate remains the same throughout the loan term in the case of a fixed interest rate. In contrast, the interest rate fluctuates with respect to the benchmark interest rate in the case of floating interest rates.
You should know the type of interest rate the lender is offering you. In the case of a floating interest rate, the lender can control the rate as per the benchmark. Fixed-rate of interest is suitable for you if you are someone who would prefer certainty, as here the rate remains the same.
Conclusion: After reading the blog, you know all the essential factors that could affect the home loan interest rates. It is thus advisable to keep these points in mind. Ensure you have a good credit score and compare all the different lenders available to determine the right fit for you.