Buying your own house is everyone’s dream. People also take home loan to buy a house, but it takes many years to repay the home loan. In such a situation, when people’s income increases, they think of ending it soon or stop it completely. If you are also paying home loan installments and are thinking of paying it early and finishing it early, then just wait. First know whether it is better to force close the home loan before time or it is better to invest that money somewhere else.
The same answer to this question cannot be right for all people. The right decision depends on your financial situation, loan tenure, interest rate and future financial goals.
If the loan is new then it is beneficial to make prepayment
In the initial years of the home loan, a large part of your EMI goes towards paying the interest and the principal amount decreases very little. In such a situation, if you prepay the loan by depositing some additional amount in between, your outstanding loan can reduce rapidly. This gives you a chance to save a lot of interest throughout the loan tenure.
If the loan is about to end then investment may be better
If your home loan is in its last few years, most of your EMI goes towards repaying the principal amount. In such a situation, there is not much savings in interest by making prepayment. In this situation, it may make more sense to invest the extra money in mutual funds, stock market, PPF or other long-term investment options.
Correctly compare investment and interest rates
Many people think that if the return from investment is higher than the interest rate on home loan, then it would be right to invest. But this does not always happen. The returns received in mutual funds and stock market are not fixed. The market keeps going up and down. On the other hand, prepayment of home loan ensures savings in interest. Therefore, while deciding, keep in mind not the potential returns, but the actual returns after tax.
Never exhaust your emergency fund
Many people invest their entire savings to finish the loan quickly. But later, if there is a medical emergency, loss of job or any big expense, they may have to take a loan again. Therefore, before making prepayment of the loan, keep an emergency fund equal to at least 6 to 12 months’ expenses.
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