1. Reduction of Interest Payouts – The most obvious benefit out of prepayment is that your interest payout reduces. Prepayment of home loan results in an immediate reduction of the outstanding principal on the home loan which results in less interest being accrued on the loan account. For example, if you have an outstanding loan of Rs. 10 lacs at 10% interest, you would be annually paying approx Rs. 1 lac interest. If you prepay the loan by Rs. 1lac, your interest would reduce from Rs. 1 lac to Rs. 90K per year – approx 10 K saving per year for the duration of the loan.
2. Prepay – without reducing the tenure – Generally when you are going to prepay your home loan, you have two options. Either you can reduce the number of home loan installments or keep the number of installments same but reduce the monthly mortgage payments (EMIs). For example, if you prepay your home loan by Rs. 100,000, you may be provided two options :
a) Instead of paying your monthly EMI (e.g. Rs. 10K per month ) for original tenure of 120 months, reduce the tenure of the same monthly EMI of Rs. 10K to 110 months (illustrative) OR
b) Keep the original number of EMIs the same, e.g. 120 months, but reduce the monthly EMI per month from Rs. 10K to Rs. 9.5K, i.e. a reduction of Rs. 500 per month in monthly cash outflow.
I prefer the second option, as it results in improving the monthly cash flows by a lesser per month cash outflow and easing the family budgets. Any further cash savings on a monthly basis can then be used to further prepay the loan if needed.
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