A Home Loan is one of the biggest financial commitments that you can make; it involves quite a lot of money, and a tangible number of years in which you’ll repay the loan. In fact, such is our human nature that as soon as you receive a hike in salary or promotion, one of the first things you’d want to do is prepay your home loan. While paying off this major liability sounds like a great idea, it can be rather tricky too, especially if you do not know about the extra charges and formalities involved in the prepayment.
By common sensibility, home loan prepayment is rather beneficial as it would reduce the interest burden, thereby reducing the overall cost of the property. However, there’s still a lot that needs to be taken into consideration. Here are a few dos and don’ts that should help you in this regard:
This applies to the time before you take the loan. You should put in a fair amount of research in choosing your provider – especially about their prepayment terms.
The loan amount will vary a lot, depending on the property you are buying. It might be a little tiresome, but always opt to reduce the loan amount rather than increasing your own burden. Avoid financial strain – first decide on a budget and stick to it; then, choose a house within that budget, and only then apply for a loan.
When you decide to prepay your loan, you get two options – to reduce the EMI or to reduce the tenure. As much as possible, you should try to keep the EMI unchanged. That is why in the beginning itself, you should choose an EMI amount that you are comfortable with, and keep paying it back steadily.
The aim of a prepayment is to be able to pay a lesser amount of interest. Most loans are designed in such a way that the earlier EMIs that you pay go towards paying off the interest, so if you want to prepay your home loan, pay it as early in the tenure as you can.
Once you are ready to go ahead with the prepayment, make sure you carry all the relevant documents, including a government issued ID proof and your cheque book to the lender.
Prepaying your home loan might not be the best option every time. Before you make a hasty decision, calculate the returns you will get if you were to invest this amount elsewhere. Compare those prospective returns vis-à-vis the interest you’ll save, and you will have your answer.
Home loans offer great tax benefits and attractive rebates. Hence, always calculate how much you’ll save before and after prepayment. In either case, make sure you avail the tax benefits available at hand to the fullest.
If the amount for which the interest is still being paid is less than the returns you will get from investing in some other avenue, just make a partial prepayment instead of a full prepayment.
Get a written proof of your prepayment and make sure it is signed and stamped by the authorized personnel at the lender. This acknowledgement will also mention the balance and outstanding amount on the loan.
A simple precaution, this will help ensure that your unused cheques are not misused.
Home loan is a major financial commitment, and so are the risks associated with it. When it comes to prepayment, you must always take a holistic view of the situation, thoroughly analyze each and every aspect, and then move ahead with deciding your subsequent course of action.
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