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People opt for home loans when planning to buy or construct their dream house and need additional funding. However, it is not the only case. A shortage of funds is not the sole reason people take home loans.
Other benefits include saving tax, securing enough liquidity, and letting out funds expand. Another benefit comes with prepayment. Unlike other loans where lenders charge prepayment penalties, floating-rate on home loans have no prepayment penalties.
We can either choose to prepay the home loan or partly prepay entirely. This article will explain the purpose of part prepayment, when and how it is done in the case of home loans.
What Is Part Prepayment Of A Home Loan?
Home Loans are helpful in several cases, but they keep pinching your financial planning; therefore, it is good to get rid of them as soon as possible. It may appear unattainable to settle a home loan before its existing term, but it is possible to plan and operate your excess income diligently. A prepayment is a prominent means to close a home loan before its due date.
It helps you become debt-free sooner, saves interest, relieves the EMI commitment, and improves your credit score. An entire prepayment or foreclosure implies a full prepayment of the loan amount. Foreclosure may not be feasible for all, especially during the initial course of the home loan.
That’s when part prepayment of a home loan comes into play. It allows paying a part of the outstanding loan portion once or more during the loan term.
When To Part Prepay A Home Loan?
When Loan Interest Is Descending
It is advantageous to prepay a home loan part when the interest rate is descending. Excluding your EMI, a greater amount goes towards reducing the principal portion of the home loan, and a lesser amount goes towards the interest.
This happens when EMI is kept the same despite a shift in the interest rate, and the term increases.
When The Rate Of Return Is Down
Take out an estimate of the loss for not investing the sum you plan to prepay. If the loss is lower than the money saved through interest, it would be fair to make a part prepayment of the home loan. The interest rate on FDs and other small saving mechanisms is low. As a result, many financial planners recommend making part prepayments on home loans.
While comparing the rate of return from the investment and on loan, you should also remember that the loan terms are lengthy, and it is likely that the interest rate cycle would reverse. So, though the interest rate is low now, it may go up. In the case of floating-rate home loans, the lenders may also revise upwards, and the interest rate on loans also may go up, resulting in an increase in the debt burden on you.
When There Is Surplus Money
While accepting a home loan remember to keep the EMI below your overall financial repayment. However, salary hikes may improve your income after a few years. In such cases, you can use the abundance of income for part prepayment of a home loan.
You must approach the lending institution with relevant documents and ask the company to decrease the tenure of the loan to advance the obligations of the EMI. This will also save a substantial amount in interest. Under loan, part prepayment, many companies offer to either reduce the loan repayment tenure or reduce the EMI.
When There Is Unexpected Earnings
You might hit the jackpot in your income due to various reasons. If you get such an amount of money, it will be smart to use the amount to prepay your home loan.
Further, you will save more money by prepaying the loan. However, you must analyze whether it’s more suitable to prepay the home loan or utilize the fund for investment.
Preserve More & Part Prepay Your Home Loan
When there is an expansion in earnings, ensure that you also improve your savings. Once you have enough savings, you may use the amount to part payment your home loan and close it before the original date.
Get freed off your home loan repayment commitments before the actual schedule. Begin by altering your spending routines and concentrating on minimizing undue expenses. With time you can also try to save more than your earlier measure.
Being debt-free is not only comforting but crucial for all of us. But it is inevitable to avoid unexpected expenses. Therefore, you should always save some money to take care of emergency needs.
While saving a subsequent amount to insure your future expenses, use the remaining amount to make a partial home loan prepayment.