How to reduce tenure of home loan?

Moving into one’s own home brings in so much happiness that can be experienced but cannot be explained. Same is the case with Bhargav, enjoying the new house, the house warming session, the praises for the new furniture and the construction.

As the month dawns, no sooner he realized about the EMI. As the case with many, he has to fund his account to pay the EMI, as the money flew with other expenses and investments. It is then he placed himself as a fund manager of the house.

So, firstly, he made a list of all expenses and income sources; and also loan and investments. He found the expenses graph goes higher as and when there is an increase in the income. Also another insight was, he had investedReduce tenure of home loan in ULIP, PF,  which are low return sources. Because of this, he had opted for low EMI which increases the loan tenure. He thought investing in those and pay higher loan interest to somebody is not a wise decision. So he withdrew funds from PF and changed his endowment policy to a term plan with a little higher returns. This left him with enough funds. Now, he used the PF for paying the principal and the money saved from not paying the ULIP to increase the EMI.

Pre-payment:

Here, we found Bhargav taking a very clever step. He reduced his principal by paying some amount, at once (other than EMI). This is called pre-payment. This reduces the principal amount and in-turn reduces the interest amount.  Pre-payment can be done any time as there are no charges applied. You can use this option whenever there is an extra source of income like increment, gifts from family, savings from salary. 

A question arises is it worth using all the money saved to pay the principal. Yes, it is worth as you close the loan much earlier than agreed. But one should be sure that there is no other investment that gives you higher returns than the interest you are paying for the home loan.

Increase the EMI:

We also found that he had opted to increase his EMI.  This too reduces the tenure of the loan. Try to avoid unnecessary expenses and increase the EMI. Imagine finishing the home loan at the earliest. It is the most relaxing thought for sure. But don’t be enthusiastic. Be a judge for yourself. Don’t make the EMI a burden. 

Search for a lower interest rate:

Always note that you have to search for the lower interest rate and shift the loan. Follow the market trends and the interest rate. Even a .5% difference in the interest rate will reduce the tenure of the home loan by almost 30 EMI for a 20-years loan. Provided, you pay the same amount of EMI, though there is a decrease in the interest rate.

Reduce tenure of home loan

Know that there are always options to close your loan as early as possible. All you need is to get guided and monitored with careful steps and timely work. Realize that only after you finish your home loan, your house becomes YOURS.

Learn about switching home loan costs!

Learn about switching home loan costs!

Over the last few quarters, the RBI has lowered the repo rate by 0.5 per cent, which has been followed by rate cuts by banks and lenders. This has resulted in lower home loan rates. In fact, the falling interest rate cycle has just begun. Indraneel has a home loan of Rs 55 lakhs that he took at an interest of 11.00 per cent. The tenure of his loan is 25 years. Five years down the line, he wants tswitching home loan costso refinance his home loan for the remaining tenure at an interest of 11.50 per cent to take advantage of the falling interest rate cycle. Will this be a wise decision?  The new rate is applicable for new borrowers and not existing ones. Should he opt for a balance transfer to another lender?

Many existing borrowers are looking to switch their home loan to another lender in order to take advantage of the new rate and lower their EMIs. When done properly, refinancing can be very beneficial.

 However, before Indraneel goes any further, he must carry out a thorough cost benefit analysis. It is important to time the loan refinancing in a way that saving on interest payable is maximized.

Indraneel is likely to find switching lucrative as only five years of his loan tenure are over, which means a large portion of his principal is outstanding, as his EMI is mostly made up of the interest component. With time, the interest component comes down and principal component goes up. 

There is no prepayment charge on floating rate loans, but some fixed rate loans may have it. 

Indraneel must check if his lender will levy the same if he were to prepay and switch lenders. The loan processing charge of the new lender is the second part of the cost that should also be considered. A high processing fee may make the new loan quite expensive. Indraneel must also consider the hassles of repeated paper work that goes into transferring the home loan from one bank to another.

Therefore, instead of making the switch decision by purely considering the interest rate differential, Indraneel must make sure that he factors in all these costs when computing the potential savings. Needless to say, refinancing is a profitable move only when the potential savings in the long run are significant.

Cost of switching  : 

Pre-payment charges (if any) + Processing fee + Legal charges (if any) + Yearly home insurance (if the lender says its must) + Other hidden charges ( SMS charges +

Provisional Statement charges + Pre-payment charges + Change of tenure charges + Change of EMI charges )

Benefit of switching using LoanYantra.com :

Helps in minimizing the cost of switching and makes this process smooth.  Your 1-day of your work with LoanYantra.com can save your 3-years of your salary.  Use the balance transfer calculator to check what you can save.