It is very common for a home loan payer to do the part payment of home loan to reduce the principal amount or a penalty for reducing the present interest rate. Both the options are the best if you want to close your home loan fast. But the question arises which option to take when. Here is a brief description about part payment of home loan and interest reduction penalty.
1. What is part payment of home loan? What is Interest reduction penalty?
Part payment of home loan- Payment made to reduce the principal of your loan. For suppose, every now and then in an year, if you save, say, minimum of Rs. 50,000 or say Rs. 1 Lakh. You can pay that amount to the bank against your home loan. This amount will be added to the principal. Inturn, this will reduce your loan tenure.
Interest Reduction Penalty – A minimal fees to be paid, to the bank, if you want to change your home loan interest rate to the present home loan interest rate.
2. When do you opt for either of the options?
Part Payment of home loan – Don’t wait to pool up your savings for part payment of home loan. Paying a minimal amount also can reduce your principal which will reduce the loan tenure. No extra fees to be paid. But be careful with your bank’s terms. Though there is no extra fees, there is a limit on the no. of times you go for part payment in an year.
Interest Reduction Penalty – If your interest rate is higher than the present interest rate and makes a much difference on your EMI, mark it in your to-do list to change your interest rate. For example, if you are on 12 % interest and the present rate is 9%. You are paying 3% extra on your home loan which is merely a waste. Instead, pay the penalty and change to the present rate, and plan for a holiday on your monthly savings.
3. Which one to choose?
This question is valid when you are almost at the end of the home loan tenure. Or, if you plan for a balance transfer. If you are in any of these situations, then paying penalty for interest reduction is a no no. This would charge your pocket an extra than reducing the burden. If you have savings, it is better to opt for part payment of home loan which will help reduce your tenure and if you want, can also reduce the EMI.
Hence, remember that both the options are the best. But what is important is how well you choose.