10 Ways to Reduce Your Home Loan Interest Rate

The evolution of the banking and financial services industry has opened new doors for customers. Today, people can access a wide range of credit products to accomplish different life goals. For example, buying a home is a common goal for most people. Home loans have bridged the gap between people and their dream houses. Like other loans, borrowers must repay the home loan amount within a specified period. 

The total outstanding balance is divided into Equated Monthly Instalments (EMIs), which include some percentage of the principal balance and the interest charges. A higher home loan rate of interest can increase the total outstanding balance and EMIs. Therefore, borrowers must choose the most feasible interest rate based on their budget, repayment capacity and other factors. Here are ten proven ways to reduce your home loan interest rate.

  1. Maintain a high credit score 

The most effective way to reduce your interest rate is by maintaining a high credit score. Most financial institutions have a minimum credit score criteria to accept applications from prospective borrowers. A credit score over 700 points is considered good and can help you get better interest rates for most loans. However, maintaining a credit score of over 750 points can get you the lowest interest rate possible. 

  1. Increase the down payment amount 

Most home loans have a minimum down payment requirement between 10% to 25% of the current home value. Many borrowers opt for a minimum down payment amount. However, making a higher down payment can get you a lower home loan rate of interest. 

  1. Shorten the loan tenure

Increasing the loan tenure reduces the EMIs, and that’s why most people opt for a higher term. However, it also increases the interest component in the total outstanding balance. On the other hand, reducing the loan tenure can decrease the interest rate for home loans. However, the EMIs must be chosen carefully using an EMI calculator home loan

  1. Compare interest rates from multiple lenders 

It’s easier to find and compare information in the digital era. Therefore, comparing the interest rates offered by different lenders before choosing one is advised. You can either visit the website of different financial institutions and track the interest rate or go to a third-party website to compare offerings from various financial institutions. 

  1. Choose a floating interest rate 

A floating interest rate rides on the market wave. It can rise or fall based on market fluctuations and changes in other benchmark indicators. Mostly, it’s 1-2% lower than the fixed interest rates offered. It can save you a lot of money on home loans as they are high-value loans. 

  1. Prepay whenever possible 

Prepaying the loan amount in part whenever you have additional funds is a great way to reduce the interest charges. Try to channel your salary bonus or other windfall gains towards loan prepayment. It helps to reduce the principal component and, in turn, the interest charges. 

  1. Refinance your home loan

Refinancing your home loan is a great way to reduce interest rates. In the case of home loan refinancing, a new loan account is opened with the new lender offering better terms. The new lender pays off the existing home loan balance on the borrower’s behalf. 

  1. Pay your dues timely   

Skipping the EMIs can be really expensive. Failing to pay the EMIs for three consecutive months can result in a defaulter status. The lender can take legal action against the borrower and even auction the property to recover losses. On the other hand, not skipping payments can improve your credit score and make you eligible for refinancing options on better terms. 

  1. Revise EMIs annually 

Revising the EMIs annually is a great way to save big on interest expenses. It is best to increase the EMI amount when you get a hike, which usually happens at least once a year. Using an EMI calculator for a home loan, one can quickly find the right EMI amount. 

  1. Start a SIP

A Systematic Investment Plan (SIP) in mutual funds can help you recover the interest paid on home loans. Taking a home loan for a higher tenure will provide you with the flexibility to invest in a SIP without missing out on EMI payments.