Purchasing a house is a significant milestone in most people’s lives. It entails a considerable financial investment and often requires taking out a home loan. The repayment of a home loan may take anywhere from 15 to 30 years, depending on the loan amount and interest rate. However, prepayment of a home loan can be a smart strategy to decrease the interest burden and the loan term. In this article, we will explore whether prepayment of a home loan is a good idea and how to use a prepayment calculator home loan to calculate savings.
What is Prepayment of a Home Loan?
Prepayment of a home loan refers to paying off the outstanding loan amount before the end of the loan term. Home loan prepayment can be made in two ways: partial prepayment and full prepayment. Partial prepayment involves paying an extra amount over and above the regular EMI, while full prepayment entails repaying the entire outstanding loan amount in one go.
Is Prepayment of a Home Loan a Good Idea?
Prepayment of a home loan is a good idea for several reasons. First and foremost, it can help reduce the interest burden and the loan term. When you make a prepayment, the outstanding principal amount decreases, which, in turn, decreases the interest payable. Moreover, prepayment also reduces the loan term, which implies that you can pay off the loan faster and save on interest.
Secondly, prepayment of a home loan can provide you with financial stability. When you make prepayments, you decrease your outstanding loan amount, which reduces your monthly EMI payments. This can help you free up some of your income, which you can use to save for your retirement, invest in other financial products, or meet other expenses.
Lastly, prepayment of a home loan can improve your credit score. When you make timely prepayments, you show lenders that you are financially responsible and capable of paying off your debts. This can reflect positively on your credit score and make it easier for you to get credit in the future.
How to Calculate Prepayment Savings using Prepayment Calculator Home Loan?
To determine the savings from the prepayment of a home loan, you can use a prepayment calculator home loan. A prepayment calculator is different from a housing loan EMI calculator and is an online tool that calculates the potential savings from prepaying a home loan. To use a prepayment calculator home loan, you need to provide the following information:
- Loan amount
- Interest rate
- Loan tenure
- EMI amount
- Instalments paid
- Prepayment amount (partial or full)
Once you have provided this information, the prepayment calculator for home loan will calculate the savings in terms of the reduced loan term, interest payable, and EMI.
If you make a prepayment of INR 2 lakhs, your outstanding principal amount would decrease to INR 48 lakhs. As a result, your loan term would decrease from 20 years to 18 years and 4 months. Even though the housing loan interest rate will remain the same yet your total interest payable would reduce from INR 50,37,281 to INR 43,66,003. Thus, by making a prepayment of INR 2 lakhs, you can save INR 6,71,278 on interest and EMI Tenure will be reduced by 20 Months.
Factors to Consider before Making Prepayments
Before making prepayments, you should consider the following factors:
- Prepayment Charges: Most lenders levy prepayment charges if you make prepayments before the end of the loan term. These charges can vary depending on the lender and the type of loan. Therefore, it’s important to check the prepayment charges before making any prepayments.
- Tax Benefits: If you have claimed tax benefits on the principal and interest payments of your home finance, a prepayment may impact these benefits. Therefore, it’s important to consult a tax expert to understand the tax implications of prepayment.
- Cash Flow: If you have a limited cash flow, making prepayments may not be feasible. In such cases, you may want to consider making partial prepayments whenever you have extra cash.
- Future Goals: If you have other financial goals, such as saving for your child’s education or starting a business, you may want to prioritize these goals before making prepayments.
For instance, let’s assume that you have taken a home loan of INR 50 lakhs for 20 years at an interest rate of 8%. Your EMI would be around INR 41,822. Now, suppose after paying 10 instalments, you have received a bonus of INR 2 lakhs and want to use it to make a partial payment of your housing loan. By using a prepayment calculator home loan, you can calculate the potential savings from prepayment.
Conclusion
Prepayment of a home loan can be a smart strategy to reduce the interest burden and the loan term. By using a prepayment calculator home loan, you can calculate the potential savings from prepayment and make an informed decision. However, before making prepayments, it’s important to consider factors such as prepayment charges, tax benefits, cash flow, and future goals. By evaluating these factors, you can determine whether prepayment of a home loan is a good idea for you and take the necessary steps to achieve your financial goals. Remember, a housing loan calculator or a home loan EMI calculator can be an invaluable tool to help you make the right decision.
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