Many people look for various strategies to either lower their debt or consolidate it. Repaying the loan in part or in full before the entire term of the loan is one of the methods that is quite common among borrowers. While it can help you get out of debt, it can also result in significant savings over what you might have otherwise paid in interest.
To make this possible, a lot of institutions now provide the ability to prepay home loans. Let’s examine what loan prepayment is and how it functions.
Home loan prepayment: What is it?
Home loan prepayment, as the name implies, is a service provided by some banks to assist borrowers in making loan payments ahead of schedule in accordance with the loan documents. Prepayment may be made in full or in part.
Advantages of home loan prepayment
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In difficult times, avoid repayment defaults.
You can avoid repayment defaults during a difficult economic time by paying off a portion of your mortgage early. This advantage of prepaying your mortgage spares you from having to spend your savings to stay out of default. To avoid problems from a potentially unpleasant situation in the future, experts advice paying off your debt earlier. It is founded on the notion that the earlier, the better. It makes sense to just pay off portions of your home loan as soon as possible, as large financial obligations will inevitably arise as the years pass.
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A shorter term
The tenure duration shortens when you complete a house loan partial payment and keep your EMI constant. An intelligent strategy is to minimise your EMI rather than shorten the duration. You can also take advantage of additional advantages of house loan prepayments with a shorter term, such as saving interest payments, reducing the principal, preserving financial stability, and maintaining a high credit score.
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Lowers your EMIs
If you choose to prepay your mortgage, it will lower your EMIs each month. When you pay off a sizable portion of your debt, this advantage of prepaying your mortgage becomes active. You can adjust your EMI payments to suit your financial circumstances if you make a larger portion payment on your home loan. If you have received a wage raise, you can also raise your EMIs to speed up the repayment process as long as you don’t shorten your tenure length.
Key factors to take into account before house loan prepayment
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Financial needs
You should first make sure that you have enough money to cover your other financial obligations, such as a future marriage or international trip, before thinking about prepaying your housing loan. A circumstance where you have overextended yourself to prepay your mortgage and are consequently cash-strapped when you need to accomplish a financial objective should be avoided. Additionally, you must make sure that you have extra money on hand in case of unexpected circumstances like a job loss or medical issues.
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Return on investments
Additionally, the cost of prepayment should be contrasted with the potential profits from investments. It is preferable to invest excess money rather than use it to pay off your mortgage early if the potential returns are more than the home loan interest.
A home loan is a long-term loan. Thus, equity investments should be taken into account when comparing the cost of your home loan to other investments of a similar size. The risk of an equity investment decreases proportionally to the length of the investment; that is, the longer you hold an equity investment, the lower the risk.
Points to consider before paying off a home loan early
The majority of Indians are trained to view debt as potentially problematic. While lowering debt is a positive thing, it’s not always wise to have a strong dislike of debt. If you make wise plans, you may comfortably manage your debt. Prepayment may not be necessary because you would have taken into account your ability to repay when applying for a house loan.
If having an unpaid loan worries you, you might want to think about buying home loan insurance instead of prepaying it. This will shield your dependents from having to make repayments if the unthinkable happens to you. Always keep in mind not to sacrifice liquidity in your eagerness to prepay your mortgage. Make sure you have enough money on hand to cover both your immediate needs and financial ambitions.
Although home loan prepayment is well recognised to be advantageous, there are a few things that every borrower should be aware of.
- Prepayment lock-in term: The majority of banks have a lock-in period that typically lasts between one and three years, during which you are not permitted to prepay the loan. According to RBI norms, floating-rate loans do not contain lock-ins, nevertheless.
- Prepayment penalty: If the loan is repaid before the lock-in period is through, a fee may be assessed (for non-floating rate loans and business loans). Verify that the penalty won’t be more than the interest savings.
- Loan interest rate: Most banks compute the loan’s interest component using the declining balance technique. This indicates that when the term shortens, the interest component becomes less significant. You can use a loan prepayment calculator to determine the precise amount of interest you can save by adhering to a prepayment plan.
Housing News Desk is the news desk of leading online real estate portal, Housing.com. Housing News Desk focuses on a variety of topics such as real estate laws, taxes, current news, property trends, home loans, rentals, décor, green homes, home improvement, etc. The main objective of the news desk, is to cover the real estate sector from the perspective of providing information that is useful to the end-user.
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