Is It Wise to Close Home Loan Early?

The largest loan in a borrower's portfolio is typically a home loan. Home loan equivalent monthly instalments can take a sizable chunk out of our pay, influencing our total budget and making us anxious in the face of uncertainty even while they help us create an asset. When I took a home loan even I had the same question, “is it good to close home loan early?”

I asked a few friends of mine who are in the financial sector is it wise to close home loan early and they told me that the earlier you pay off your mortgage, the better. 

Is it better to close home loan early?

Here are five justifications for why it makes sense to prepay mortgages.

It will reduce the overall amount of interest you pay: Your monthly mortgage payment includes an amount for interest costs. A portion of the loan that is prepaid is applied to the principal. The expense of interest will decrease as soon as the principal does. You can save lakhs of rupees over the course of your loan if you pay off your mortgage early.

Your capacity to obtain additional loans will rise: If you have a sizable home debt, getting a car loan to upgrade your vehicle or even getting a personal or school loan may be challenging. Your prospects of getting a personal loan or a car loan are somewhat diminished when you take out a mortgage. Lenders are more inclined to extend you a greater loan amount if you have fewer outstanding debts.

You'll use less credit as a result: Prepaying house loans sooner enables you to lower your credit usage in these unsettling times when job losses are becoming more frequent. If you anticipate future job or income insecurity, the entire budget may also become more reasonable.

According to common recommendations, the whole amount of EMIs you pay each month for all of your debt, including loans, credit cards, and other obligations, shouldn't be more than 30 to 40% of your monthly take-home pay. Any amount more significant than that could lead to increased credit use on your behalf. Experts advise that the monthly EMI should represent less than 40% of the monthly take-home pay compared to the monthly income.

The independence of not having to make mortgage payments is wonderful. Owning your home outright is a nice feeling. You may rest easy knowing that there is no chance you won't be able to pay your monthly EMI if you suffer a financial setback. If you don't make your EMI payments on time, your house can be repossessed. When you pay off your loan and own your home outright, there is no chance of losing it to foreclosure.

When should you not go for a home loan early closure?

It can be advantageous to stick with the standard EMI plan when a home loan is not a hardship on your finances. As a home loan gives tax benefits, this needs to be brought up. The principal element of EMI is dealt with under Section 80C. In accordance with section 24, the interest component is also subtracted from your taxable income. The maximum amount of tax that can be detected annually is INR 200,000.

It is advisable to prepay the loan if the annual deduction is more significant than INR 200,000; otherwise, you can think about paying the EMI. However, you won't be able to claim the deduction paid above INR 200,000.

Now you know the answer to the question “is it good to close home loan early?”