What are the advantages and disadvantages of pre-paying a home loan, know the complete calculation

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In this era of inflation, it is not easy for everyone to fulfill their dream of buying a home. Buying a home is one of life's biggest financial decisions. Nowadays in many big cities of the country, buying a house has become so expensive that most people have to take a loan for it. Even if a home loan is readily available, its cost has to be paid in the form of interest. The RBI has been continuously increasing the repo rate for the past few years, due to which the interest burden on home loan borrowers has increased significantly. Due to this, many banks have increased the interest rates. After taking a home loan, many people have to pay installments for 5 to 6 years to repay it. In such a situation, it is natural to question whether the home loan should be pre-paid or not.

Home loan pre-payment means pre-payment of home loan. One way to do this is to pay off the entire loan at once. But usually it is not possible to pay so much money at once.

Premature loan repayment by increasing the EMI amount

You can increase your EMI amount by talking to the bank and thus repay the loan early. Apart from this you can also reduce the number of home loan EMIs by transferring the loan to a bank that offers loans at a lower interest rate than your current bank and get debt free faster than before.

Deposit the additional income into the home loan account

Another easy way to pay off home loan early is to keep depositing it in the home loan account whenever you have extra income from anywhere. By doing this, the home loan principal balance will reduce rapidly and the principal amount will increase in your previous EMI. This way you can pay off your home loan early. But if the home loan is several years old and your income and savings have increased significantly during that time, you can repay the entire amount in one go. It is important for you to understand both the advantages and disadvantages of home loan prepayment.

You can save lakhs of rupees by pre-paying the home loan

The advantage of home loan prepayment is that it reduces the interest burden on you. While paying home loan EMI you are paying principal as well as interest. The longer the loan tenure, the more interest you will have to pay. Hence when you prepay your loan, the interest you have to pay during the entire loan tenure is reduced. That is, by pre-paying the home loan, you can save lakhs of rupees given based on the interest rate of the home loan.

You can get rid of debt soon

Prepaying your home loan means getting out of debt sooner. Once the loan is free, you don't need to pay EMI every month. It is natural that now you can invest that amount somewhere else better or use it for your other important work.

Your credit score will be better

Prepayment of home loan also improves credit score. Increases the lender's confidence in your ability to repay the loan. So it can be easy for you to take a loan if needed in future. Apart from these advantages, there are some negative aspects of home loan prepayment, which are equally important to know about.

Liquidity

If you give a large part of your savings towards home loan prepayment, it will adversely affect your liquidity. In such a situation, you may face difficulty in raising money as soon as you suddenly need it.

Opportunity cost

The amount of savings you plan to use for your home loan pre-payment can be repaid if you invest it elsewhere. When you don't use it to repay the home loan, you lose the potential return you could have earned on it, which you have to bear on pre-paying the home loan is called opportunity cost. If the potential rate of return is less than the home loan interest then it is beneficial for you to repay the home loan, but if the opportunity cost is high, you should consider this cost as well. For example, if you invest that money in stocks or mutual funds, you can earn more than the interest rate on your home loan. However, it should also be kept in mind that high-returning equity or equity mutual funds often do not guarantee returns and the invested capital is also at risk.

Penalty charges may apply for pre-payment

Many lenders charge a pre-payment penalty on prepayment of home loans. This penalty reduces the financial benefit of paying off the loan early. So the cost of pre-payment penalty should also be considered before taking any decision regarding home loan pre-payment.

The loan with the highest interest rate should be settled first

While deciding on home loan prepayment it should also be kept in mind that the interest rate on home loans is generally lower than other loans. So if your car loan, personal loan or credit card loan is due, pay it off first. In this too, the loan with the highest interest rate should be settled first. Deciding whether pre-payment of home loan is right depends on many factors including your personal financial situation, home loan interest rate, your income and employment status and age, family responsibilities. If you have a lot of financial obligations, which are more important than paying off the home loan quickly, that should be tackled first. Besides, even if you don't have a lot of money at once, you can increase the EMI, transfer the loan to a bank that offers low-interest loans, and transfer the loan to reduce the interest burden and repay the loan faster. You can consider methods like depositing additional income in the home loan account.