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Make Yourself Aware About the Home Loan Prepayment Calculator

Nishi Singh

Acquiring a home requires massive funds, making credit the ultimate solution for many. Given the affordable EMIs and interest rates a home loan offers, the choice becomes even more viable. The modern market is filled with numerous loan alternatives tailored to suit a specific purpose.

Even amid a particular category like home loans, customers can find different perks and features. One such perk is loan prepayment. Repaying loans monthly for years can be excruciating. Chances are, you will acquire the necessary funds to repay the loan before the tenure is over.

If your loan provider allows, you can prepay the loan entirely or partially before the due date. It helps save money, reduces stress, and clears your debt in one go. Yet, despite such benefits of the facility, many remain skeptical or unaware of its usage.

That is why the article will help you learn everything about home loan prepayment.

What is Prepayment of a Home Loan?

When you apply for a home loanyou must pay monthly EMIs or Equated Monthly Instalments till the tenure is over. However, if the borrower gets access to extra funds such as sale of a property, or a bonus from work, they can repay the loan wholly or partly before the tenure. The process of repayment before the tenure’s end is called loan prepayment.

Factors to Consider Before Prepaying Home Loans

While prepaying a home loan EMI seems like the best choice; you should consider some factors beforehand.

Prepaying During the Lock-In Period

Some banks offer a lock period spanning 1 to 3 years. During this period, borrowers cannot prepay the loan. However, institutions cannot impose such restrictions on floating-rate loans taken for non-business purposes.

Interest Rate 

Generally, financial institutions calculate loan interest using the reducing balance method. This means that the interest rate is higher in the initial period while it reduces over time. Thus, borrowers can use a home loan prepayment calculator to figure out the amounts and save money.

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How Does Prepayment of Loans Work?

Borrowers usually opt for loan prepayment while paying a monthly home loan EMIThe EMI comprises two components; the primary amount and the interest. Depending on the borrower’s terms with the lender, minor additional components such as insurance and service charges may also form a part of the EMI. 

Contrary to popular consensus, EMIs are not divided equally between the principal amount and the EMI. As stated above, interest rates fluctuate during the loan tenure. Here is an example to better explain it.

Imagine Mr. A has taken a home loan of INR 20 lakhs at a 9% interest rate, payable over the next 20 years. The amount breakup will look like this:

  • EMI: 17,995 INR
  • Total Interest: 23,18,687 INR
  • Total Payment: 43,18,687 INR

If Mr. A decides to prepay the loan in the 11th year, the breakup will look like this:

  • Principal Balance: 14,20,518 INR
  • Prepayment Amount: 14,20,518 INR
  • Interest Saved: 7,38,825 INR

Loan prepayment depends on whether you are making a full or partial repayment. In the above case, Mr. A saved over INR 7 lakhs by completely paying the loan before the tenure. That does not mean you must prepay the entire amount to access gains. 

For example, if Mr. A decides to prepay 5,000 INR per month from the 11th year, the breakup will look like this:

  • Principal Balance: 14,20,518 INR
  • Prepayment Amount Monthly: 5,000 INR
  • Total EMI: (5,000 + 17,995) 22,995 INR
  • Interest Saved: 2,44,067 INR
  • Tenure Decreased: 36 months

By paying INR 5,000 extra per month, he reduces his loan tenure by three years while saving more than INR 2,40,000. 

The Importance of Loan Prepayment 

Loan prepayment reduces accrued and loan liability while they also improve your credit score. It highlights your repayment capabilities and sense of financial responsibility, thereby positively affecting your future financial ventures. 

Borrowers should note that every financial institution across the country can check their financial history. In addition, bureaus such as CIBIL compile users’ financial data to reflect their credit records. 

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With such perks, it is a given why borrowers should consider prepayment when they apply for a home loanHowever, if calculating the prepayment amount seems challenging, borrowers can opt for a home loan prepayment calculator to help them out. It can help them save time and money while elevating their credit portfolio.

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