Many people search for various methods to either reduce or consolidate their debt. One option that is fairly popular among borrowers is to pay off the loan partially or completely before the full term has passed. You may save a lot of money over what you may have otherwise paid in interest, in addition to the fact that it can assist you in getting out of debt.
What is Home Loan Prepayment?
As the name suggests, home loan prepayment is a service offered by some banks to borrowers to help them make loan instalments ahead of time in line with the loan documents. Prepayment can be done entirely or partially.
Key factors to consider before home loan prepayment
- Financial needs- Before considering prepaying your mortgage, you should first make sure you have enough money to cover your other financial commitments, such as a future marriage or an overseas trip. Avoid getting into a situation where you overextended yourself to prepay your mortgage and then take a personal loan for other financial commitments, as rate of interest on mortgage loan is generally lower than personal loans to the tune of minimum 250 bps. You should also make sure you have additional cash on hand in case of unforeseen events like a job loss or medical problems.
- Return on investment- Furthermore, it is important to compare the cost of prepayment with the prospective returns on investments. If you have extra cash, investing is preferable to paying off your mortgage early if the prospective returns outweigh the house loan interest.
A mortgage loan is a lengthy loan. To properly compare the cost of your house loan to other investments of comparable size, equity investments must be taken into consideration. The risk of an equity investment diminishes proportionally to the investment’s duration; that is, the risk has reduced the longer you hold an equity investment.
Advantages of home loan prepayment
- In less time than you anticipate, you can eliminate your debt.
- Along with lower interest rates, you’ll also benefit from a cheaper EMI.
- You have the freedom to pay whatever amount in accordance with your needs and financial constraints thanks to prepayment.
- Your credit score will also be raised as a result of this, which will ultimately make it easier for you to get further loans.
Although prepaying your home loans provides benefits, you must carefully consider the advantages and disadvantages before making a decision. If you exercise due diligence, you’ll get the most benefit from this option and acquaint yourself with sheer convenience.
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