Buying your own home is like a dream come true. One of the key factors that influences your decision is finance. That is why you must know how you can arrange funds so that you don’t have to struggle after purchasing the house. Step-up and step-down loans are home loans that have variable EMIs spaced out over their duration. Some banks offer their customers flexible repayment options to make repayment easier. In step-up home loans, the EMI is low initially and increases as years roll by. In step-down loans, the EMI is high initially and decreases with the passage of time.
The step-up option is convenient for borrowers who are in the beginning of their careers, while the step-down loan option is useful for those who are close to their retirement and currently make good money.
Here’s what you need to know about each:
Step-up loans
A step-up loan is a type of home loan in which the interest rate increases over time. Typically, the interest rate starts out low and gradually increases over the life of the loan. This type of loan is also known as a graduated payment mortgage.
The main advantage of a step-up loan is that it allows borrowers to qualify for a larger loan amount than they might otherwise be able to afford. This is because the initial payments are low, making it easier to qualify for the loan. As the borrower’s income increases over time, she can afford to make larger payments, which keeps the loan affordable.
Disadvantages
- Before you choose a step-up loan you must factor in the pros and cons to avoid any financial trouble later on. Here are some points to keep in mind.
- Higher total interest payments: Since the loan payments increase over time, borrowers will end up paying more in total interest than they would with a traditional loan.
- Risk of default: If the borrower’s income doesn’t increase as expected, she may have difficulty making the higher payments, leading to default.
Step-down loans
In a step-down loan the interest rate decreases over time. This type of loan is also known as a decreasing rate loan. The main advantage is that it allows borrowers to pay less interest over the life of the loan. This is because the interest rate starts out high and gradually decreases over time. As the borrower pays off the loan, the interest charges decrease, which means more of the payment goes towards paying the principal.
Adhil Shetty, CEO, Bankbazaar. com, says, “Both step-up and step-down loans can be useful for certain borrowers, depending on their financial situation and goals. It’s important to carefully consider the terms of any loan before agreeing to it, and to ensure the loan fits within your budget and long-term financial plans.”
Disadvantages
- Higher initial payments: Step-down loans typically have higher initial payments, which can be challenging for those who have just started their careers and have lower salaries.
- Less flexibility: The repayment structure is predetermined, making it more challenging to change the payment schedule to suit changing financial circumstances.
Discuss your needs with the bank and find out what works for you. It’s essential to consider both the short-term and long-term costs and choose the repayment structure that works best for your financial circumstances.
EASY OPTIONS
- The step-up option is convenient for borrowers who are in the beginning of their careers. The EMI is low initially and increases over the years
- The step-down loan option is useful for those close to retirement and currently making good money. The EMI is high initially and decreases with the passage of time