If it was not for the finance companies and banks, many of the current breed of home owners wouldn’t have been able to buy themselves a property. The loan facilities provided by these firms as helped to realize the dream of many people. However, paying off the loan through mortgages is a big financial commitment. No one wants to let EMIs eat into a major part of their monthly salaries. Therefore many home owners are looking to pay off the debt as soon as possible. Here are benefits and the shortcomings of paying off your debt earlier.
The current trend in home buying is paying off the mortgage early. The spiraling property prices coupled with rising interest rates are making the buyers prefer early payment of loans. As per a home owner, the sooner the loan is paid, the sooner they would be free from the shackles of debt and the sooner they will be able to use their money for more than just paying monthly mortgages. Another benefit that serves as a reason for going for prepayment includes the rising interest rates. By paying early, you stand to save the tens of thousands of dollars’ worth of interest.
Prepaying the smart way
Prepaying a home loan isn’t an easy thing to do as a considerable amount of money is at stake. Therefore, instead of burdening yourself economically and mentally, you can always go for partial prepayment. Under this arrangement you can add a little amount to your principal and thereby shorten the length of your loan. This form of part-prepayment will reduce the outstanding loan amount and the net interest outgo. However before adding that extra amount to your principal make sure your contractual agreement with the finance company doesn’t read penalties for prepayment.
How about refinancing to a shorter-term loan?
If you find your income means increasing, you can always ask the bank to refinance the mortgage to a shorter-term loan. The payments will certainly be higher, but since the interest rates will also be low, you won’t experience much of a dent in your income. A long-term loan, although having low interest rates, will end up making you a lot poorer than you think. If you are not sure about the effect of a shorter-term mortgage and do not want to take the risk, take out a long-term loan, say 30-years but make payments as if it was a 10-year loan.
Plan the prepayment in advance: You will have to make amendments in your lifestyle for few years in order to keep aside additional money. However, these are small sacrifices that you would make in favor of a better future.
What are the perils of prepayment?
There is a huge risk of running your life berserk in a bid to prepay. People who practice prepayment of loans often have to put a brake on their retirement savings. Sometimes the mortgage is accompanied with a fixed percentage prepayment penalty. Besides, you won’t be able to enjoy the tax breaks that accompany a home loan. Owing to the huge monetary deficit that a prepayment creates, people become woefully under-saved for emergencies and retirement days. The extra money that one pays for prepayment could have been used to make more money or would have been a comfort for one’s retirement days. Prepayment seriously compromises your financial security and until or unless you have at least six to 12 months of emergency savings, there is no wisdom in going for it. Also, you can look at the interest trends and make the decision of either investing at higher rates and paying low rates on your mortgage.
An engineer by qualification, but destined to be a writer, Saurabh Tyagi has spent last four years of his life closely observing and working within the real estate industry. His written works on topics like real estate in Varanasi, home buying and selling have been published on leading online blogs.