Fixed rate home loans offer borrowers the clarity that whatever the situation in the markets, their EMI will not change, and it will stay set at the rate that they received at the inception of the home loan. Thus, even if rates rise in the economy, the borrower does not suffer or get surprised with a much higher EMI that he or she might not be able to afford.
Another advantage that fixed rate home loans offer is that if rates are low, one can lock in this rate for the entire term of the loan. However, in India its very difficult to get a fully fixed rate home loan, so this is not a practical option in our country. In western countries it is quite possible to do this.
The disadvantage of Fixed rate home loans is that if the rates were to become much lower, then one is still locked into these rates. Sometime, one might be able to break the loan by doing a balance transfer or refinancing the loan. However, this would usually entail some kind of a prepayment fee or fine that the borrower has to pay.
Because its difficult to get fully fixed rate loans in India, the lenders often price these loans about 2%-4% points higher.
This message was edited 1 time. Last update was at 05/03/2010 13:14:36
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