Prepayment Of Home Loan Vs EMI
Most people look to buy a home. It not only means that there is an asset which will only increase in value but also that there will be tax benefits. Further, the purchase of a home means no hassles of changing addresses at a number of places each time the rental agreement gets over or living under such fears. Home loans are usually the way which most people take to buy homes. This helps in balancing the capital outflow and also affords tax benefits.
The most common confusion is that whether to reduce the tenure by making prepayments or going the equated monthly instalment or EMI way. People wonder what to do when interest rates fall and what when they rise. People also think about opting for interest payments in under construction properties as opposed to EMIs.
Prepayment Not Always the Way:
While popularly it is believed that prepaying the home loan affords higher benefit, it is not always the case. The amount of interest on a home loan maybe 12%, however the effective rate will be 12 reduced by the amount of tax benefit being secured. This depends the tax bracket in which one is – such as higher the tax bracket 30% say, higher the benefit, lower the effective rate.
There are many methods in which loan burden can be reduced by increasing the amount of EMI. There are those who shift to a different loan by closing the present loan. It has usually been seen that prepayment is a better option in the earlier years of any home loan. It is so because the amount of principle in the EMI will be higher earlier on. As the same gets repaid the amount of interest component gets higher comparatively. This higher principle component will however result in loss of tax benefit which is restricted to 2 lakhs rupees.
If the loan is closed earlier, then one does get the advantage of having the home debt free earlier than the loan tenure which is quite a satisfaction in itself. Prepayment during the later years does not serve the same benefits as that during early on as the principle component is anyway less then.
There are many who opt for a higher EMI by as it helps reduce the interest cost which in turn raises the price of the home. This however, is possible when the other responsibilities like children’s education savings are not hampered. The important factors to consider when deciding on prepayment as opposed to EMI are bank prepayment charges as well as the unexpired tenure of the loan.