Home Loan Prepayment Benefit: Consistent prepayment of home loan is an option every loan borrower should go for. This not only helps in early repayment of the loan but also helps in reducing the interest amount on the home loan. You can save your hard earned money.
what was the prepayment
Whenever you take a home loan from a bank, you repay the loan every month through EMI. The lending bank deducts the EMI amount from your bank account on the due date of the month. EMI has two components, one is the principal amount and the other is the interest amount. For example, if you pay an EMI of 20,000, then there is a portion of the principal as well as interest.
In the initial years of repayment after taking the loan, the interest amount accounts for more of the EMI and less of the principal. But when the time to repay the loan comes near, the share of the principal amount is more and the interest is less.
How Prepayment is Helpful
Whenever you prepay the loan, it directly helps in reducing the outstanding amount of principal. Whether the prepayment amount is small or large. If you prepay in a month, then interest is calculated on the remaining principal amount in the next month. If you make a prepayment, it will help in prepaying the loan.
understand through example
Suppose you have taken a home loan of Rs 20 lakh for 20 years at an interest rate of 7.50 per cent. So we can understand it through example.
If you pay an EMI of Rs 16,112 every month, then after 20 years, you pay a total of Rs 39 lakh, of which Rs 20 lakh is the principal amount, then the interest amount is Rs 19 lakh.
But if you prepay Rs 1,000 every month, you can save Rs 2.70 lakh towards interest. That is, out of total 240 EMIs, you can save 29 EMIs.
Home loan prepayment can be done by only those customers who have taken home loan on floating rate. This facility is not available to home loan borrowers at a fixed rate.