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Home loan is comes with basket full of advantages, but it has the bigger liability too. Most of the loan borrowers consider it as one of the biggest financial liability. You opt for a loan for at least 10 years or more and for that tenure you agreed to pay monthly EMI to the lender. For that tenure you blocked a specific amount of money from your monthly income to repay the loan. In case you default in paying the monthly EMIs, bank or the lender will charge you higher rate of interest on that amount. Therefore, it becomes a liability and necessity for you to make the timely payments of your monthly EMIs.
Different banks offer different options to make repayment and pre-payment of your loan. You can choose the most convenient way to make repayment of your home loan. There are banks, which also accept partial pre-payments against home loan without charging any pre-payment fee or penalty against payment. To pre-pay your loan or foreclose your loan you can save some money to make one big payment for closure. You can also use your saving and funds to pre-pay the loan amount. There could be May ways to save the money and pre-pay your loan. Most importantly, you should always build a strategic and disciplined approach to pre-pay loan. Without making any financial plan or proper strategy you will not be able to pre-pay your loan amount. You could also link your salary account or your saving account to your loan account to ensure that your extra money will be credited to pre-pay the home loan. However, your home loan is not just a liability, but it caters benefits also. The biggest advantage of taking a home loan is you can save money in your income tax return against the home loan. For instance, if you have taken a home loan of Rs. 20 lakhs for maximum 30 years from any bank at the rate of interest 9.55%.
Your monthly EMI will be: Rs. 16,890
Total interest amount will be: 40, 80,434
Total amount (Principal+ Interest): 20, 00,000 + 40, 80,434= 60, 80,434
In case if you change the tenure to 15 years with same rate of interest:
Your monthly EMI will be: Rs. 20,945
Total interest amount will be: 17,70,078
Total amount (Principal+ Interest): 20,00,000 + 17,70,078 =37,70,078
The above table clearly indicates the difference between the total interest amounts you paid against the loan. Though, longer period gives you an advantage of paying lower EMIs, but shorter duration will reduce your total out go on interest amount in long run. Therefore, it is always advisable to take a loan for shorter duration and make some partial payment to foreclose the loan. In both the scenario if you make a big down payment against your loan to reduce the interest it will reduce the total amount of EMIs on monthly basis.
There are some pros and cons linked with home loan. Let’s discuss a few of them to understand home loan pre-payment option better.
Keep the EMIs same: The first and basic thing while making the prepayment just ensure that it will give you advantage. If you keep your EMI unchanged it will be more beneficial. If you want to prepay your loan there are two option either you can reduce the EMIs or reduce the tenure of the loan. So if you are comfortable in paying the same amount, try to reduce the time rather than going for lower EMIs. For example: if you have excess funds of Rs. 10 lakh and you want to pay for the home loan. If you opt for the same EMI you can pre-close your loan before the actual tenure.
Reduces the interest payout: The biggest advantage of making partial or pre-payment of the loan is it helps in reducing the total interest outgo on your amount. It will help in saving the money in long run as you hit the principal amount early, therefore, you can easily close the loan before actual tenure.
Build a repayment cycle along with saving: You should create a repayment cycle along with saving. If you know that after paying your monthly EMI and meeting other expenses, still you have some money in your account divert your funds into savings and other investments where you are receiving higher returns. It will help you to earn more money and later on you can diver that amount to pre-pay the loan.
Calculate your benefits first: This is really important to calculate the benefits in advance. Don’t make the prepayment in a hurry without calculating your overall advantages. It you have taken the loan at 10% rate of interest and you invested your money into saving schemes at the rate of 12% it will be more beneficial than paying your debt. This way you will earn some more money in long run and meet your losses.
Don’t forget about tax benefits: If you have availed the loan, it gives you some tax benefits to claim. Till the time you are repaying the home loan you can claim tax benefits for both the amount paid against your loan as principal amount and interest amount. It will also help in saving the total amount against your income tax.
Don’t pre-pay the whole amount: You should not pre-close your loan in one go. Rather, go for making some partial payments against your loan. It will help in reducing the outstanding amount and you can still claim the tax benefits linked with your loan during the tenure. Instead of making the one full down payment, invest your money into higher paying funds and claim higher returns along with tax benefits. This will keep you in a win-win situation from both the sides.
Don’t switch over the loan without calculating: If you are going for balance transfer or switching your interest rate to another always calculate how much money you are going to save. Always ask for all the hidden charges and conversion cost linked with your transfer. In case if you are paying more money to switch over your balance then stick to your present loan. It might be it is not that helpful in reducing the overall cost of your loan. When you use balance transfer banks charge transfer fee, service charges, penalty and other charges against your switch over or balance transfer. Therefore, calculate all the charges in advance.