Home Loan: Buying a home is everyone’s dream, but a home loan turns this dream into a financial responsibility for many years. Banks typically offer home loans for a period of 20 to 30 years, forcing a significant portion of their income to pay EMIs. However, this financial pressure can be significantly reduced by adopting the right strategy. A little planning can save lakhs of rupees in interest and reduce the loan term.
How can Save Interest?
Financial experts believe that paying just one extra EMI a year can reduce the loan term by several years. This significantly reduces the total interest payment.
For example, if a person takes out a home loan of ₹50 to ₹60 lakh for 25 years at an interest rate of approximately 8 to 9 percent and pays an additional EMI every year, their loan tenure can be reduced by approximately 4 to 5 years. This can result in savings of approximately ₹12 to ₹15 lakh in total interest.
Bonuses, annual increments, or other additional income can be used to pay the additional EMI. This reduces the pressure on the monthly budget and helps repay the loan faster. Experts recommend that people focus on reducing the total interest rather than lower EMIs.
If interest rates remain stable and a person continues to pay their EMIs without increasing them, the loan tenure can still be reduced rapidly. Making periodic part-prepayments is also considered a good way to reduce interest.
Things to Consider When Taking a Home Loan
Properly Assessing Your Repayment Capacity
Before taking out a loan, it’s important to ensure that your EMI doesn’t exceed 30 to 35 percent of your monthly income. This can help prevent future financial difficulties.
Choosing the Right Interest Rate
It’s important to understand the difference between floating and fixed interest rates. Floating rates are lower but can change over time. Fixed rates remain stable but can be higher initially.
Choosing the Right Loan Term
Longer-term EMIs are lower, but the total interest is higher. Shorter-term EMIs are higher, but the interest is lower. Therefore, it’s important to strike a balance between the two.
In addition, processing fees, prepayment charges, and other fees should be carefully considered, as sometimes other fees are added while showing a lower interest rate.