A lot of us are averse to being financial debt-ridden. A loan is a debt that would typically intend to settle at the earliest, preferably prepayment on the mortgage, i.e. pay before it is scheduled. However, a mortgage needs not to be taken into consideration in the very same light as individual finance, auto loan, etc. A mortgage provides a number of benefits which may make early repayment unbeneficial.
Early repayment is a facility which enables you to settle your housing finance, in part or complete, prior to the completion of your finance period. Normally, consumers opt for early repayment when they have surplus funds.
Vital Variables to Be Considered Before Making a Decision to Prepay Your Housing Loan
- FINANCING REQUIREMENT
Emergencies taking into consideration prepayment of your housing finance, you need to make sure that you got sufficient funds in your hand for your financial goals such as marital relationship, traveling abroad, etc. You need to stay clear of being in a circumstance where you have actually overextended on your own to prepay your home loan, and therefore, are funds-strapped when you need to satisfy an economic objective. Besides, you additionally need to make sure that you have surplus funds readily available for clinical emergencies, or unpredicted occasions such as task loss.
- REVENUE FROM INVESTMENTS
The expense of prepayment needs to be compared with the returns that can be gained from investments. If you have the opportunity to make returns which are more than the home loan passion, then it is far better to spend the surplus funds instead of making use of the same to prepay your home mortgage.
A mortgage is long period finance; to make an “apples-to-apples” comparison of your home loan price I a comparable investment, equity financial investment must be considered. Equity financial investment is a long-term financial investment where the danger minimizes in proportion to the duration of financial investment, i.e., the longer you hold your equity financial investment, the lower will be the risk.
- STAGE OF THE FUNDING
The main advantage of prepayment is if you get a reduction in interest outflow. The rate of interest part in the EMI is highest throughout the initial stage of the mortgage. Therefore, early repayment of loans in the mid-to-late phase may not give you the complete benefit of reducing interest. In such instances, it is prudent to invest, excess funds.
- RATES OF INTEREST
Real estate lending is much easier to service; the interest rate on the mortgage is usually lower compared to other loans, for example, credit card or personal finance loan. Consequently, if you wish to decrease financial debt, it is better to prepay high interest-bearing funding on concern basis, as against real estate loans which bring a reduced interest rate.
- EARLY REPAYMENT FEES
The decision to early payment on the mortgage of your home needs to be thought about after representing the price of prepayment. While on flexible price home mortgage there are no prepayment costs, on repaired price home loans, lending institutions typically charge a penalty of 2 percent of the quantity being pre-payed with re-finance, i.e. when you borrow to prepay your home mortgage. Nonetheless, if you use your very own funds to prepay your real estate loan, no early repayment penalty is levied.