Getting a house of one’s own is a dream for many as it is the basis for accumulating wealth. To finance this dream, individuals often opt for mortgages. It may sound easy, but getting your home loan in the right time frame isn’t easy. You have to understand the algorithm behind home loans and you are ready to increase your loan repayment.
Before we learn more about techniques for increasing repayment, let’s talk about the basic concepts – the amount of principal and interest.
Principal simply means the original loan value you received from the lender and interest is the amount the borrower has to pay with the principal amount.
For example, if you have taken a loan of Rs. 1,00,000 at 8% for one year, after the completion of one year, you will have to pay principal + interest i.e. 1,00,000 * 8 * 1 / 100 = 8000 = interest. Hence, the total amount payable = Rs. 1,08,000.
The interest rate of home loans can be classified into two types: variable rate and fixed rate. The fixed interest rate remains fixed for the duration of the loan, while the variable interest rate continues to fluctuate according to market conditions and offers the borrower the possibility of early repayments.
Simple ways to pay off your mortgage faster
1. Maximum deposit – The first option is to put down the maximum possible down payment and take only the amount required in the form of a loan. The principal amount will decrease and therefore the total interest and EMI value will also decrease. Ideally, 20-25% of the total loan amount should be paid as a down payment. You can pay more, in case you have other funding sources. You can also consider liquidating your investments that are not generating decent returns. This would be very helpful for you to reduce your debt burden.
2. Lower interest rates – Various banks and financial and non-financial institutions offer home loans at varying interest rates. Before taking out a loan, the most important step is to be well informed before choosing a lender. Borrowers should also analyze home loan interest rates according to their budgetary needs. If your interest rate is low, it would be relatively easy for you to pay off the loan faster compared to a loan with a higher interest rate.
3. Additional costs – Besides a low interest rate, another factor you need to consider when choosing a lender is additional fees. This includes processing fees, late payment penalties, etc. It may seem like a minor addition to the amount, but they make a huge difference. Therefore, look for a home loan with minimal additional costs.
4. Increased NDEs – If your salary increases after getting a home loan, you can use your extra income to pay a higher value of EMI, which will eventually reduce the term of the loan. Even a minimal increase in the EMI value can significantly reduce the term of the loan.
5. Partial payments – If you have opted for a floating mortgage interest rate, you can benefit from the possibility of partial payments. Paying the entire loan as a partial payment can result in a drastic reduction in your home loan amount. It is suggested to use bonus funds, gifts or any unexpected income for partial payments. Be sure to read any terms and conditions issued by your lender regarding partial payments.
6. Ideal loan term – The ideal duration of the loan differs from person to person. If you opt for a short loan term, the amount of the EMI will be higher. This will result in a quick recap of your home loan and the total amount of interest payable will be low. On the other hand, if the term of the loan is longer, the amount of the EMI will be lower and you will not have to face a monthly charge. The home loan closing will take longer and the total interest payable will also be higher. Choose the term that suits your financial planning.
7. Falling Interest Rates – There are times when the RBI cuts the repo rate, which also leads to a reduction in the interest rates for home loans. In such a scenario, you can either reduce the EMI value or the term of the loan. It is considered ideal to reduce the tenure duration and let the EMI value be the same to enjoy a quick closing of your home loan.
8. Tax Benefits – A home loan also comes with the possibility of tax advantages. This saves the lender a significant amount of funds every year. Under the Computer Act 1961, a borrower can get a tax benefit worth Rs. 2,00,000 per annum on home loans.
Using some of these simple tips can help you pay off your home loan in minimal time, giving you a hassle-free loan experience and opportunities for future savings.
Author Bio: Vinod Gill is a content writer specializing in financial and banking topics. He is a digital marketing consultant, blogger and co-founder of Ecompany.fr