In today’s world, a home loan is a valuable tool for making the dream of owning a house a reality. However, sometimes the interest on a home loan exceeds the cost of the property. In such cases, many opt to repay the loan early. Pre-payment allows you to repay the loan before the scheduled term, giving you financial freedom sooner.
However, before choosing this option, you should consider a few important factors. Many people believe that a charge applies when opting for home loan pre-payment. Below, we will explain whether choosing the home loan pre-payment option is the right decision for you.
What is Home Loan Pre-payment?
In the pre-payment option, you pay a portion of your loan before the due date. People opt for this option to save on interest costs. Additionally, by choosing pre-payment, you can reduce the loan tenure, gaining financial freedom sooner. Before opting for this option, make sure to check whether the bank will charge any penalty for pre-payment.
Is there a prepayment charge?
Many banks or financial institutions charge a penalty on the prepayment of a loan. This amount can be a percentage of the outstanding loan amount or a flat fee. Many banks charge a penalty only in the initial years of the loan. After this, many banks do not charge this penalty and some banks charge a penalty based on the payment of interest. On the other hand, many banks do not charge any penalty for pre-payment. In such a situation, you should understand the terms and conditions of pre-payment before signing the home loan agreement. Apart from this, you should also know about the terms and conditions of other banks.
Keep These Things in Mind
Before selecting the pre-payment option, you should understand the calculation of penalties and interest. Sometimes, the penalty may exceed the interest savings. In such cases, make sure to evaluate all the numbers before making a decision.
Additionally, ensure that opting for pre-payment does not affect your emergency fund. If it does, you may face financial difficulties in the future.