Buying a home is a big financial commitment and many homeowners want to pay their loans off as quickly as possible. Prepayment of home loan loans is one of the most effective strategies in this direction. With prepayment, you can pay part or all of your home loan before the stipulated due date. Thus, reducing the outstanding principal and interest incurred over time. But how do you determine the best way to approach prepayment? A prepayment of home loan calculator is what you need to make smart decisions.
What is the Prepayment of a home loan?
Paying back a part or entire amount of your home loan ahead of the stated loan tenure is what is termed prepayment. Most home loan agreements allow you to make prepayments either in the form of a lump sum or through regular additional payments. With this, you can cut down on the total interest repayments you will make in the long run.
One very big advantage of prepaying your home loan is that it helps you reduce your outstanding principal amount. Since the interest is calculated on the remaining loan balance, the smaller the principal amount the less the interest burden.
How Does Prepayments of Loan Calculator Help?
A home loan prepayment calculator allows you to calculate the effect of principal payment on loan tenure and interest paid on the loan. It helps you to visualise the benefits of prepayment, making it easier to plan your repayment strategy.
Here’s how it works:
Input your details: You have to fill in the current loan amount, the interest rate, the tenure and the money you would like to prepay.
Choose prepayment type: Some calculators will let you choose whether you want to pay a lump sum prepayment or pay extra each month.
Calculate the results: It will also tell you how much your prepayment will reduce your loan balance, how much interest you will save and the revised length of the loan.
Why Prepaying Is The Best Option?
Interest Savings
As mentioned, the earlier you pay your home loan, the lesser interest you will pay. By reducing the principal amount fast you can cut down the interest costs significantly, especially if your home loan has a long tenure.
Shorter Loan Tenure
Prepaying your loan also helps you reduce the overall tenure. For example, with a 20-year loan, you could get it down to 15 or 12 years with a prepayment amount. It can also help free you from the long-term burden and apply your resources at the right place.
Faster Financial Freedom
Owing your home means there are no fewer liabilities or worries. When you prepay your home loan, you come closer to gaining financial freedom.
Improved Credit Score
One way to increase your credit score is, to prepay your loan. While this doesn’t guarantee anything, it does send a signal to lenders that you are managing debt responsibly.
Loan for Plot Purchase: A Smart Investment Option
Among different home loans, the plot purchase loan is one of them. This type of loan lets you acquire land to build your new house or to use land as an investment property. The repayment structure for a plot loan is similar to a home loan, but there are key differences to consider, like:
Higher Interest Rates: Loans for land tend to have slightly higher interest rates compared to home loans as lenders view the land as a risky investment.
Eligibility Criteria: The eligibility criteria may vary differently from regular home loans. You may need to provide additional documents such as a land title deed to get approval.
Conclusion
A prepayment of home loan calculator is a smart way to make the right financial decisions. It allows you to see how extra payments impact your loan and helps you choose the best repayment strategy. For this situation, prepayment is a good way to save on interest pay off your loan faster or lower your tenure to gain financial freedom.
