LOADING

Type to search

The Pros and Cons of Prepaying Home Loan

Property

The Pros and Cons of Prepaying Home Loan

Share

Home Loan Prepayment

As an Indian, one of the most thoughtful dreams for you is to buy a home. In the fulfillment of this dream, you leave no stone unturned. You end up with a home loan if you don’t have enough money and agree to a repayment term that may be anywhere from 15 to 30 years. This means you continue to pay EMI to set aside a portion of your monthly income for that reason for the tenure setting. You can sometimes come into certain lump-sum funds if you are in business or a bonus from your employer, such as a windfall profit.

https://www.icannmembers.org/wp-content/uploads/2020/05/dc-Cover-8tilb7r6k7hhc5bkmc4bunagc5-20181005001730.Medi_.jpeg

On the surface, it makes prudent sense to decrease any loan liability. However, since the lender sets rules for prepayment, you need to realize that prepayments are not as straightforward as you might have thought. In an objective evaluation of the pros and cons, you have to consider certain obligations and then take suitable action one way or the other.

Presenting below some of the pros and cons of having your home loan prepaid to help you make this assessment:

Prepayment Advantages

  • No Penalties for Prepayment – If the home loan interest rate is floating, as per the RBI directive, there is no prepayment fee. Thus, it is a good choice to prepay on this count.
  • Lowering the unpaid amount of your loan – The prepayment that you make will decrease the outstanding principal.
  • Lowering tenure – By keeping the EMI and reducing the tenure, you can feel the impact of the prepayment on your home loan. Thus, the remaining balance principal gets cleared quicker.
  • EMI Reduction – Your lender will allow you to keep the tenure when you decide for prepayment but lower the EMI to clear the outstanding balance. This means you’re going to have more cash in your hands than ever. You can check the home loan EMI calculator online for further information.
  • Credit score improvement – The effect of prepayment on your home loan account decreases the balance outstanding, which directly impacts your credit score, thereby improving your creditworthiness. You must be vigilant to see that the lender has given the credit bureau the prepayment transaction.

Prepayment drawbacks

While there are many advantages as mentioned above, there are many drawbacks that you may face depending on some aspects of your current financial position, as well as the conditions imposed by the lender as follows:

  • Charge for Prepayment – When your home loan is taken out on a fixed interest basis, a prepayment penalty can be up to 3% of the balance outstanding on your home loan account can be levied by the lender.
  • Loose tax advantages – The Income-Tax Act provides tax incentives on home loans that include interest payments and principal repayments. If you prepay for the loan, you will sacrifice some of the benefits. Before you make the final decision to prepay or not to prepay, you should have a word with your financial consultant.
  • Loss of chance to clear costlier loans – Home loans, which are secured loans, usually bear the lowest interest rate. You may have other kinds of loans, such as personal loans or auto loans, or even company loans. It is also wise to clear your loans that bear a higher home loan interest rate if you have some funds to prepay some loans.
  • Loss of incentive for investment – If you have abundant funds and you have the option of prepaying a home loan or investing in other opportunities that can offer you greater returns. Therefore, to arrive at an acceptable decision by considering other investment opportunities in addition to the prepaid alternative, you must consult your investment advisor.

Conclusion

From the above, it is clear that before committing to pre-pay or not to pre-pay, you need to look at the pros and cons of prepaying a home loan. You can evaluate and decide based on the above pointers. Depending on your present financial condition, there are several choices to choose from.

Samuel J. Morales

Beer geek. Tv trailblazer. Passionate internet practitioner. Gamer. Lifelong introvert. At the moment I'm working with tar in Africa. Spent 2001-2005 getting to know junk bonds in Minneapolis, MN. In 2008 I was marketing squirt guns in Naples, FL. Earned praised for my work selling pond scum in Minneapolis, MN. Set new standards for merchandising action figures in Miami, FL. Earned praised for my work implementing sock monkeys in Prescott, AZ.

    1