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Why it makes sense to pay off your house loan early

<p>Home loans often have terms of 20 to 30 years, making them very long-term obligations. A person is always psychologically burdened to be liable for anything for so long.</p>
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<p>As a result, it is usually recommended to pay off a house loan before its whole term. It goes without saying that it relieves you of obligation and lowers your interest expenses.</p>
<p>Depending on the average interest rate throughout the course of the loan, a 20-year house loan often results in interest payments of up to 100–130% of the loan amount.</p>
<p>For instance, the interest on a 50 lakh loan paid over 20 years at an average rate of 10% would come to R65.80 lakh. You would spend about R58 lakh in interest on an R50 lakh loan if the average interest rate for the duration of the loan is 9%.</p>
<p>Depending on how and when you are returning the loan early, you may significantly lower the interest cost by paying it off sooner.</p>
<p>Using the previous scenario again, let’s say someone takes out a loan for R 50 lakh, which they pay back over 20 years at 10% interest. There will still be around R36.69 lakh in outstanding debt after ten years of EMI payments.</p>
<p>One would pay off their debt in full in the next 74 months (rather than 120 months) if they prepay R10 lakh at the beginning of the eleventh year. Additionally, the total interest expense drops from R65.80 lakh to R53.65 lakh (18.5%).</p>
<p>There is a good reason to pay off your house loan early. Methods of prepaying mortgages One benefit of house loans is that there are no extra fees associated with early repayment or loan termination.</p>
<p>On loans with variable rates, banks are not allowed to apply foreclosure or prepayment penalties, according to the Reserve Bank of India (RBI). The majority of house loans have variable rates, which allow banks to adjust interest rates as needed.Prepaying your house loan makes more sense since it will lower your interest rate and allow you to pay it off before its term expires.</p>
<p>These are the several options for paying off a house loan early. Raising the EMI You could feel that the monthly payments on your house loan are a big burden during the first few years after you take it out. However, with a raise in pay, one might afford to pay off the loan quicker than the whole term by raising the EMI.</p>
<p>Your loan duration and interest costs might be significantly shortened with a healthy 20–25% rise in your monthly EMI. Without visiting the bank office, an internet application may be used to raise the EMI.</p>
<p>Making a lump sum payment: Another option is to pay the whole amount due at a later date. It may be made in smaller installments every two to three years, or all at once, say after ten years. Even a principle payment of R2 lakh might shorten the EMI period by several months, resulting in an earlier loan closure and a consequently cheaper interest rate.</p>
<p>Transfer of balance: If another bank offers a cheaper interest rate, it is possible to move the outstanding loan balance to them. It’s recommended to choose balance transfer only in cases when there is a significant rate difference since it normally carries a fee.</p>
<p>Make sure you don’t cut your EMI amount while switching to reduced rates. In this manner, you gain from a shorter term as well as a cheaper interest rate. After assessing a small charge, your current bank often extends a reduced rate to you as well. Unless you have further reasons to switch banks, do select this option before moving your balance amount to a new bank.</p>
<p>You may save interest by paying off your house loan early. In spite of making partial payments, Pankaj Mathpal, the founder and managing director of Optima Money Managers, says, “You can simply ask the lender to reduce your home loan EMI or it can simply help you in reduction of tenure.”</p>
<p>When to make a prepayment</p>
<p>Experts advise against making prepayments at the conclusion of the lease, preferring to make them early on.Prepaying the loan early may not be a smart idea, says Pankaj Mathpal, particularly if you have already finished a significant amount of the term. This is because, in the end, the majority of your monthly installments go toward principle and very little goes toward interest.Given the very low interest rate, you may choose to invest the funds rather than pay back the loan. Before you intend to foreclose, you should also take the tax advantages of the loan into account, he advises.</p>