People take home loans to fund the purchase of their dream house. They borrow a percentage of the property’s price as a home loan and pay the remaining amount from their pocket as a down payment. After fixing repayment tenure according to their budget, they agree to repay the loan and the interest rate in convenient EMIs. However, if their financial condition improves over time, they may want to use it for their loan repayment. It is called home loan prepayment, which can be full or partial, based on the borrower’s repayment capacity.

Since prepaying a loan is a crucial decision affecting one’s finances, here are a few tips for using a home loan prepayment calculator.

How Does a Prepayment Calculator Work?

Home loan prepayment is an arrangement that allows borrowers to repay their loan if they have surplus funds before their loan term ends. For this, they may use a home loan prepayment calculator to check the impact of their prepayment. As prepaying the loan lets borrowers reduce their tenure, the calculator shows them their savings and gives them an amortization schedule to better manage their finances.

When negotiating prepayment with the lending institution, the borrowers may either opt to reduce their EMI amount while keeping the term same or the tenure while keeping the EMI same. Either way, it helps them save significantly on their loan payments. Prepayment calculators are online tools that let borrowers determine the impact of prepaying the loan. While deciding on prepayment, a calculator helps determine these crucial loan factors:

  • Revised loan tenure
  • New EMI amount
  • Due outstanding balance
  • Amount saved

After identifying these factors, borrowers can know how much they can save with their revised EMI amount and loan tenure. While manual calculations are time-consuming and complex, online prepayment calculators are easy to use. All one needs is to enter loan details like their outstanding loan amount, tenure, interest rate, and prepayment amount. The tool shows overall savings from prepaying the loan.

Smart Ways to Use a Home Loan Prepayment Calculator

As a home loan borrower’s financial condition improves, they may want to prepay their loan. Here are a few smart ways to use a prepayment calculator:

  • Opt for partial prepayment to reduce the loan tenure

Borrowers in their 20s or 30s may close their loan in 8-10 years with their savings, bonuses, extra income, increments, etc. They may use this money to prepay the loan, which cuts down the interest payment and reduces the loan tenure. However, checking the lender’s prepayment conditions, fees, and maximum limit to prepayments a year is essential.

  • Increase the EMI amount

If the borrower is currently paying a low EMI amount with an extended tenure, they will pay more interest by the term’s end. One may use a house loan EMI calculator to find shorter loan tenure with affordable EMIs. Then they may contact their lending institution to restructure their loan. Opting for a bigger EMI reduces the term, enabling the borrower to clear the loan sooner.

  • Consider the prepayment charges

Some lending institutions charge prepayment fees to accept loan prepayments. However, home loans taken at floating interest rates for non-business purposes do not have any prepayment charges.

  • Prepay towards the beginning of the home loan tenure

From each EMI, some portion goes towards the interest component, and another goes towards the principal amount. It happens when the EMI remains the same despite changing interest rates, and the borrower increases the tenure. Since the principal outstanding is higher during the initial few years of the tenure, most of the EMI goes towards interest payments.

Thus, prepayment during this time would go a long way towards reducing your tenure as well as tptal interest outgo.

  • Consider a Home Loan Balance Transfer at a Lower Rate

Individuals who need funds to purchase their house may agree to borrow a home loan at higher interest rates due to a moderate credit rating or lower income. However, if their financial condition improves, they may consider switching their outstanding loan balance to a new lending institution offering them a lower interest rate. Home loan balance transfer lowers their overall loan repayment due to reduced interest rates. One may use a home loan prepayment calculator to decide the best plan to repay the loan faster.

Prepaying a home loan frees borrowers from their EMI obligations much earlier than their original repayment schedule. However, it is crucial to be careful about liquidity needs and use the prepayment calculator wisely to work out this option.

Final Words

Prepaying your home loan will help you save a lot of money, but sometimes it might make more sense to pay off your loan more slowly. For example, if you have other debts like credit card debt to pay off first. Unless you have very valuable and flexible money sitting around, it’s generally not a good idea to use your savings to prepay a home loan (at least not without doing the math first).

Mainly pre-paying your home loan will save you thousands in interest charges over the years ahead. And that makes for a great ROI.

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