Should You Prepay Your Home Loan? Check These Facts Before Deciding

Home loan

Debt in any form increases the financial liability of the debtor. And if the debt is in the form of a loan or credit card, timely repayment is vital to keep your credit score high. However, besides paying loan EMI within due dates, you may also prepay a lump sum amount whenever you get extra funds. 

Loan prepayments are beneficial for several reasons. Go through this article to discover how house loan prepayments can increase your peace of mind and make you an intelligent borrower.

Understanding House Loan’s EMI

House or home loans are a blessing to people willing to purchase or construct a property they cannot afford by saving money. Lenders offer attractive terms and interest rates to ensure the house loans never burden the borrower financially. 

Generally, borrowers use a home loan EMI calculator to check their monthly liability before applying for house loans. Knowledge of the EMI is important to adjust their monthly budget to accommodate house loan repayments.

Home loan EMI is typically composed of two elements – principal and interest. So, the monthly amount you pay reduces the outstanding principal and interest. Initially, the lender deducts the interest component from your EMI, and only when the interest component reduces substantially do they start taking back the principal. 

Why Should You Prepay House Loans?    

Some home loan EMI calculators provide the home loan amortization schedule for free. The amortization schedule contains a detailed division of the principal and interest you need to pay over the loan term. 

Sensible borrowers often use prepayments to bring down the principal. As the principal reduces, so does the interest. And, if your principal and interest reduce sharply, your lender may reduce the overall loan tenure. 

So, the primary benefit of house loan prepayments is that it enables you to close your loan early and become debt-free.  

Here is an example to simplify how house loan prepayments can enable you to repay a loan quickly:

Suppose you apply for a house loan worth INR 20 lakh at a 7.5% interest rate for twenty (20) years. If you put these numbers on a home loan EMI calculator, the calculator will show you an EMI of INR 16,111. 

This means that for a loan of INR 20 lakh, you pay a total (principal+interest) of around INR 38.7 lakh. Hence, the interest cost is a whopping INR 18.7 lakh. 

However, if you decide to increase the EMI by just INR 1,000, i.e., 16,111 (EMI) + 1,000 (Prepayment), you can save around INR 2.66 lakh on the interest cost. A quick calculation of the amount shows that the amount equals 29 EMIs. 

So, you can become debt-free at least two (2) years earlier than you planned by paying an extra INR 1,000 every month.  

3 Benefits of Prepaying House Loans

Besides enabling you to close the loan earlier than planned, house loan prepayments also offer the following benefits:

Your Loan Eligibility Improves

Timely repayments and regular prepayments allow you to close house loans earlier than planned. As you close your loans early, you become eligible to apply for new loans. 

Moreover, regular repayments help increase your credit score to get better interest rates.

Prepayments are Free on Floating-Rate Loans

According to the Reserve Bank of India guidelines, lenders cannot charge any prepayment penalty on floating-rate loans. 

So, if your loan is on the floating rate, you can prepay as many times as you want without worrying about paying anything extra. This can result in higher savings. 

Plan Your Budget Better by Calculating and Scheduling Prepayment Using a Free Home Loan Emi Calculator

When determining the EMI or deciding the prepayment amount, you can use a home loan EMI calculator to make informed decisions. Reputed lenders provide home loan calculators for free. You can enter the principal, interest rate, and tenure to get an estimate.

 A good approach is to avail of a loan amount lesser than 40% of your net monthly income. This leaves you with enough money to prepay the loan whenever you wish to. 

Conclusion

House loans are a blessing to those willing to fulfill their housing dreams conveniently. Prepaying home loans is always a sensible decision since it allows you to become debt free much faster than you think. 

Uneeb Khan
Uneeb Khan CEO at blogili.com. Have 4 years of experience in the websites field. Uneeb Khan is the premier and most trustworthy informer for technology, telecom, business, auto news, games review in World.