Timely payments on your loan can significantly affect your credit score. The terms of every loan you take after this will depend on how efficiently you’ve paid your EMIs. Structuring a loan so that you have to pay it over a long duration will mean that you’ll have to pay a sizeable amount in interest. The problem arises when you can’t guarantee your revenue inflows. When your loan should be paid off in that period, you’re assuming that you’ll keep earning enough funds until the end of the loan duration.
Not only is this hard to guarantee, but you can’t be sure your revenue will grow as the inflation grows. Whether your income does or not, your interest does. While most loans follow a fixed interest rate, some follow floating rates dependent on a marker such as the NYE index. When this happens, you lose more than the benefit you gained from taking the loan. One way to reduce this burden is to close your loan early. There will be premature closing costs, but in the long run, they more than makeup for the money you spend on interest payments.
Besides, markets tend to be volatile. If you purchase your home when the market is booming, expecting that the real estate rates will rise, there is a good chance that the market could fall. If it does, you’ll be left with an asset that’s worth less than the loan you’ll have to repay. Your goal should be to become a homeowner as quickly and as efficiently as possible. There are always financial experts who advise against premature repayment of a loan. But their assessment depends significantly on the future predictions of the market given its current state.
Ultimately, you have to decide if your financial position allows you to bet on the long positions in the market. If you want to play on the safe side, you can always close the loan early if the closing costs are less than the interest expenses you have to pay. Here are some ways that can help you in closing your home loan early.
Pay a Higher EMI:
You can always restructure your loan, so your EMIs are higher. While this increases the rate of interest that you have to pay, it does clear your loan early. Doing this isn’t easy, though. Your expenditure for the remaining period will increase. It means you’ll have to adjust your expenses and savings. It also means that your deductions as part of tax-savings will end quickly. You should also consider the amount of EMIs that your income bracket will allow as a deduction.
Partial prepayments of the loan will help in reducing your debt burden. Banks will obviously charge you a service fee for processing the transaction, and a penalty for prepaying the mortgage. But if you have other motivations beyond just cost comparisons, you should prepay the principal even if the penalties are fees amount to higher than the time-adjusted value of interest rates. You should remember that you do not have to overwork yourself to gather enough funds to prepay a part of your loan.
Most payments are scheduled once a month or once in two months. Interest is always calculated on the outstanding balance in your loan account. So you can always reschedule your payments to biweekly or triweekly payments. Not only will this reduce the interest payments over the long run, but it will also help in clearing the loan early.
Refinance Your Loans:
If your interest rates are calculated on a floating basis, market volatilities can make you pay higher or lower rates. If that is more than your risk appetite, you can always refinance your loan. When you refinance, you don’t just have to change the interest rates. You can always change the duration of payment, and the amount of EMIs you can afford to pay.
There will always be some windfall gains you earn during a year. This could include tax refunds, high returns on your investment, windfall profits, high bonuses, or PF withdrawals. If you utilize this towards payment of your loan, you won’t have to spend money out of your pocket. This way, you won’t have to adjust your living standards because of higher payments. It is also important to understand that when you default on your payments, the penalties you incur will add to the existing burden of payments. Apart from affecting your credit score negatively, it will increase the amount you’ll have to pay.
Most banks offer you a Mortgage financing agreement as part of restructuring your loan. You must read the fine print even though the banker has confirmed to the terms you’ve asked. Any refinanced loan will require a new loan agreement.You can always use a mortgage calculator to see the duration and the amount you’ll have to pay at the EMIs you can afford.
Jessica, is a writer by calling and an academic. She has created scintillating and remarkable content for dozens of websites in the Business Sector. She possesses a fair understanding of the inner workings of several business establishments, making her the foremost expert in this field.