Should you or should you not prepay your Home Loan? Keep reading to find out.
Prepaying your Home Loan can be a bit tricky, especially when you’re not aware of the formalities and extra charges involved in the process. Prepayments might be beneficial for you financially as they help reduce the burden of interest, thus reducing the overall cost of the property.
As soon as you receive some extra cash in the form of a hike, promotion or a new job that pays really well, the first thing that probably pops into your head is, “Woohoo! Let’s prepay that Home Loan now!” Getting rid of your liabilities sure sounds like the smart thing to do, but there are a couple of things that you need to consider.
Additional Reading: Should You Prepay Your Home Loan? Few Things To Keep In Mind
Before you start thinking about what to do and what not to, here are a couple of questions you need to ask yourself:
- How old is my Home Loan?
- How much tax am I saving?
- What’s the rate of interest?
- Am I finding it difficult to manage my EMIs?
- What’s the return I could get by investing the surplus cash in a good instrument?
The answers to these questions will help you determine how to go about prepaying your Home Loam. You need to know that there are a couple of things that could possibly go wrong in the process of a Home Loan prepayment. To ensure that nothing goes wrong for you, here’s a list of dos and don’ts you need to keep in mind:
Dos
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Choose your loan wisely
Although this applies to the initial phase of getting a Home Loan, you need to put in a lot of research before deciding which one to go with – especially if you plan on making a prepayment at some stage. It’s advisable to check all the options being provided by various banks before taking the final call. Choose a scheme that gives you an option to prepay without charging you for it.
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Know your budget
Depending upon your need—whether you’re about to purchase an apartment or an independent house, the loan amount changes considerably. If you’re planning to build a house from scratch, the charges might increase further. Choose a location according to your budget and try your best to get the right deal.
Although, it might be slightly tedious, it’s always better to reduce the loan amount rather than increasing your financial burden. Decide on a budget, choose a house accordingly and then apply for a loan. Skipping the first step might leave you financially strained in the end, and you wouldn’t want that, would you?
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Pay steady EMIs
To ensure that prepaying a loan works to your advantage, keep your EMIs unchanged. When you decide to prepay, you get two options to choose from—you could either reduce the EMIs or reduce the tenure of the loan.
In both these cases, the aim is to keep the EMIs unchanged. So, choose an EMI amount you’re comfortable with and try to keep it as steady as possible. Calculate your EMI
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Prepay as early as you can
The main aim of making a loan prepayment is to reduce the amount of interest paid and eventually lift some of the financial burdens off your shoulders. Most of these loans are designed in such a way that the initial EMIs go mostly as the interest component.
To put it in simpler words, the earlier you make a prepayment, the more interest you get to save. So, if at all you want to prepay, try doing it in the early stages of the loan, rather than doing it towards the end.
- Carry all relevant documents along
Once you consider every aspect involved in prepaying a Home Loan and are ready to go ahead with it, carry all the relevant documents- a government-issued photo ID proof (like a driver’s license or PAN card) and your cheque book along. Apart from making your loan prepayment, you also need to pay simple interest for the month towards which the principal is being prepaid.
Don’ts
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Calculate the benefits beforehand
Prepaying a Home Loan might not be the best alternative in every case. Therefore, before making any hasty decisions, it’s advisable to calculate the returns that can be made from the same amount if invested elsewhere and compare it with the interest amount of the Home Loan.
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Don’t overlook the tax benefits of the loan
Home Loans can offer great tax benefits with attractive rebates on the principal and interest components. That’s a good enough reason for you to never overlook the tax benefits of the loan.
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Don’t prepay the entire loan amount
Many Home Loan seekers look to prepay the full loan amount. Instead of doing this, you can look at a partial prepayment if the amount for which interest is being paid is less than what the funds would fetch when invested in other financial instruments with assured returns.
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Don’t forget to get an acknowledgment for your payment
Getting an acknowledgement for your prepayment is essential for you to have a written proof of the fact that you’ve made a payment. It also mentions the principal outstanding after prepayment and the balance Home Loan tenure. Remember to get it signed and stamped by an authorised representative of the bank.
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Don’t forget to collect unused cheques from the bank
This is a precaution measure. Collecting cheques will ensure that nobody misuses unused cheques. Ensure collecting them to prevent misuse.
Additional Reading: Home Loan Handbook: All Questions Answered
Now that you know all about the dos and don’ts of Home Loan prepayment, it’s time to apply for a Home Loan!