Check this Out Before Prepaying Your Home Loan

HomeFinanceCheck this Out Before Prepaying Your Home Loan

Owning a home is satisfying. It is a prudent and rewarding investment decision as well. But there are some important considerations to keep in mind before you decide to buy a home or start paying it off. Here are eight things to consider before prepaying your home loan in India, so you can take advantage of all the benefits of owning your own home while avoiding mistakes that could cost you later on.

Make Sure You Can Afford the Extra Payments

You cannot spend more money than you have, even if it is for a good cause. Before making any payments above and beyond what is due on your home loan, be sure that you can afford them and that you have enough room in your budget to cover any increased costs they may bring. If not, it may be smarter—and cheaper—to delay paying off your home loan for now. Prepayment of a home loan could also make sense if you are confident that interest rates will rise significantly over time.

Paying extra principal means lower interest rates, saving you money over time. However, there is no guarantee of when or how much rates will rise (or fall), so proceed with caution here. Finally, remember that paying off your home loan is not an investment; do not pay extra simply because you want to invest those funds elsewhere!

Understand the Costs Involved in Paying off Early

While it’s tempting to pay off a loan early, you must ensure that you have enough money left over for emergencies. If you decide to prepay, it is best not to make that decision on emotion. Consult a trusted financial advisor who can help assess whether paying off early is right for you.

Calculate What Interest You Will Save with an Early Payout

When you first take out a home loan, you are probably given a calculator that allows you to determine how much interest will be charged on your debt if it is repaid over different periods. To help make sure you are making a smart decision, do some more research into whether prepayment of a home loan makes sense for you. In many cases, people pay off their loans early because they have an emergency savings fund and can afford to save their monthly interest payments.

Evaluate Your Financial Situation for the Next Five Years

Make sure you are prepared before deciding to pay off your loan faster. You must evaluate your financial situation at least a few years from now. Check out your expected income and expenses, and ensure that after settling these payments, you will have enough money left over to meet your financial goals. These could include retirement planning, setting aside funds for emergencies, or savings for future large purchases such as buying a car or getting married.

Check If There Are Any Advantages to Paying Off Early, Such as Saving on Insurance Premiums

In many cases, early redemption is possible only when you take out a premium-paying term life insurance policy along with your home loan. It is best to check for any advantages of paying off your home loan early. Also, keep an eye on the housing loan criteria or any penalties that may be applicable if you pay off early.

Do not Take Money Out from Your Investment Options That You Kept Aside for Future Use

If you decide to settle early, be careful not to take money out of other investments meant for your future. In general, it is not prudent to dip into long-term investment options (such as retirement accounts) if you can avoid, since you will be cutting down on your eventual benefits. 

What Will Benefit Your Financial Goals Better: Reducing Loan Tenure or EMI Reduction

Although prepayment and reducing monthly instalments can get you out of debt quicker, it is essential to understand which option will benefit your financial goals better. For instance, if you plan on buying a new car after 12 months, you may want to reduce EMI by prepaying. On the other hand, if you need money for your children’s college expenses or want to buy another property within 2 years of taking a home loan, then reducing tenure would be a better bet.

Consider Your Existing Investment Options and the Returns Derived from Them

Think about whether other investments (such as mutual funds) might be able to deliver a similar return if you consider prepaying your mortgage. Housing prices and rental yields vary greatly across cities—what works for one person’s portfolio may not work for another’s.

The Bottom Line

One of the most important financial decisions you will ever make is how to pay off your home loan. With many options available and various factors to consider, home loan prepayment can be intimidating. The above guide will help you make a decision based on your financial situation. So do not forget to consider these factors before going through with it.

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