Everything You Need to Know About Home Loan Pre-Payment Charges and Benefits - Read Now

Prepayment of home loans is one facility that many borrowers opt for when they feel like paying off their loan before the term gets over. It can reduce the interest burden considerable, bringing them financial freedom sooner. However, before making this decision, that the following information about charges, benefits, and conditions associated with the prepayment is a must know.

What is Home Loan Prepayment?
Home loan prepayment is the partial or full amount of loan paid by the homebuyer before the scheduled repayment term. This results in a reduction of interest expenses because banks compute interest on the reduced outstanding amount. The loan may be paid off earlier, and the individual gets that sense of freedom in finance. However, before making such a move, knowledge about the prepayment charges and penalties is necessary.

Prepayment Charges and Penalties
In most cases, there is a penalty to be paid when repaying home loan advance. This can be either as a percentage of the loan outstanding or purely flat, and generally comes in the first few years of the loan. The penalty rate varies with the bank and the agreement of the loan, and as such could potentially affect the savings you will make by reducing the tenure of the loan.

It's not all gouda, though. While many banks do offer home loan prepayment options without penalties, it's still essential to check your loan agreement for terms and conditions. Some banks may allow it free of charge but apply the rule only after a certain number of EMI payments have been made.

Advantage of Prepaying Home Loan
Probably one of the biggest advantages of a home loan prepayment is the saving in terms of reduced interest payments. The early reduction in the principal would save the amount of interest to be paid during the entire tenure of the loan. In addition, the prepayment of the loan also saves hard-earned EMI, which might be relatively comforting for an individual.

On the other hand, consider whether early loan repayment is the right thing for you to do. You would not want to drain your emergency fund to pay off a loan since this might leave you vulnerable to unforeseen financial crises. The best approach would always be to strike a balance between loan prepayment and maintaining savings at par.

Calculating Prepayment Charges and Savings
After a decision to proceed on home loan pre-payment is made, the penalty charges and saved interest should be calculated. The better cases end up costing the penalty more than the interest saved. Therefore, it is aptly wise to make minute comparisons of costs and benefits before arriving at any decision.

For instance, if the penalty charge for the outstanding loan is 2%, while the savings in interest for prepayment stands at 1%, then it is best not done. These figures should be calculated beforehand so you can decide whether prepayment is the right financial choice.

What to Observe Before Prepaying
Before paying any portion of your loan, consider the following:

Penalties and Charges: Understand the amount charged for a penalty and how this will affect your savings.
You can also calculate the saving of interest done. The emergency funds remaining, as you will pay partially after doing prepayment; therefore, you might still have some money there that will be useful. Find and go through your loan term whether prepayment is allowed based on your agreement.

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