Different type of interest rates offered for home loans

Inter­est rates vary from insti­tu­tion to insti­tu­tion as detailed in my 1^st post. The inter­est on home loans in India is usu­al­ly cal­cu­lat­ed on month­ly reduc­ing bal­ance. In some cas­es, dai­ly reduc­ing basis is also adopted.

Annu­al reduc­ing: In this sys­tem, the prin­ci­pal, for which you pay inter­est, reduces at the end of the year. Thus you con­tin­ue to pay inter­est on a cer­tain por­tion of the prin­ci­pal which you have actu­al­ly paid back to the lender through EMIs paid dur­ing the year. This means the EMI for the monthly/Daily reduc­ing sys­tem is effec­tive­ly less than the annu­al reduc­ing system.

Month­ly reduc­ing: In this sys­tem, the prin­ci­pal, for which you pay inter­est, reduces every month as you pay your EMI.

Dai­ly Reduc­ing: In this sys­tem, the prin­ci­pal, for which you pay inter­est, reduces from the day you pay your EMI. EMI in the dai­ly reduc­ing sys­tem is less than the month­ly reduc­ing sys­tem & is bet­ter from the point of view of the customer.

So, before choos­ing any Insti­tu­tion for tak­ing loan not only go by the lucra­tive rate of Inter­est offered by that Insti­tu­tion but also inquire about the bal­ance reduc­ing method applied by the Insti­tu­tion to cal­cu­late the actu­al effec­tive rate of Interest.