Choosing Between Fixed And Variable Interest Rates – Darn What A Choice!
Once you resolve to take up a mortgage, the immediate matter that tempests your mind is selecting between fixed and floating rate of interest. It is easy to get dumbfounded at this point if you are not financially educated.
Usually, when the media splashes reports on banks increasing home loan interest rates in and their impact on Monthly Installments, you deem it better to select fixed home loan rates. In fact, your banker may also suggest you to go for the same.
Now ideally as it should be, we assume that once you choose 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 subsequent increase in the same. But in reality this is not always the situation.
Here we demystify the nature of fixed interest rate mortgage transaction for you so that you can make an knowledgeable decision over the matter.
* Read the small print of your home loan document. You will find that the bank has the right to give 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 lender to undertake appropriate modifications 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 home loan company you can save a lot of money over the life of your home loan and in almost all cases the consulting cost is free.
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