Interest rates have been peaking in the past few months due to inflation and the falling Indian Rupee against foreign currencies. Home loans have also been affected by this hike to a large extent. This factor has many homeowners wondering whether it is a good idea to prepay their home loan before the tenure is complete.
Home loan prepayment is not a new concept, but it definitely deserves to be explored in detail given the current scenario. It is important to weigh the pros and cons of repaying your home loan ahead of time in order to arrive at the right decision for you and your family.
Home Loan Prepayment: Everything You Need to Remember
1. Cut Down on EMIs or Reduce Loan Tenure
The decision regarding whether to prepay by cutting down on your Equated Monthly Installments (EMIs) for the home loan or whether to reduce your loan tenure depends on how much disposable income you have in hand. EMI reduction is definitely the best bet if the hike in interest rates will strike a huge blow to your expected level of liquidity and existing investments.
2. Consider How Much Can Be Saved Through Loan Transfer
A home loan balance transfer is a good option to lower your interest rates without hurting your financial health. With a loan transfer to another lender, the home loan prepayment interest rates are reduced and you don’t have to worry about touching your investments. It is definitely worth comparing the savings made through this method and deciding whether or not it is a good decision for you.
3. Never dig into Your Emergency Fund
It is never a good idea to use your emergency back-up funds for home loan prepayment. Ideally, an emergency fund should be sufficient to cover an individual’s expenses for 6 months. In case you use this money to pay back your home loan and an unforeseen event happens to befall you or your family, it will force you to make unsound financial decisions. This may include taking loans at high interest rates or selling off your existing investments at lower rates. Thus it is wise to consider prepaying your home loan only after setting aside money for any and all contingencies.
4. Don’t use What You Have set Aside to Fulfill Your Financial Goals
We all make savings in order to meet certain financial goals which are an expression of our life goals. Whether it is money kept aside for the down payment for a vehicle or for a child’s education, it is not advised to utilize this for home loan prepayment. Using this amount to repay a home loan may pressurize you into taking a high interest loan later on when the need arises to meet this goal.
Quick tips for Home Loan Repayment
In summary, you can pay back your home loan comfortably if you consider the above factors closely prior to making your decision. In addition, it would be of immense benefit if you start by paying off any unsecured debt and negotiate with your bank to waive off any prepayment penalties as well.
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