Home loans are big-ticket loans with the loan amount very easily running into 7 or 8 digits. Such a hefty amount also inevitably leads to high loan EMIs and therefore, has a direct impact on a person’s standard of living. Most smart home loan borrowers therefore try their best to prepay their loan as and when possible.
Prepayment refers to the process of making small lump sum payments towards one’s home loan or clearing the entire amount due and closing the loan before the agreed tenor. When an individual clears the entire amount due, it is known as foreclosure.
Prepayments and foreclosure not only help a borrower become debt-free quickly but they also allow individuals to reduce the total interest payout on their loan and therefore, reduce the total cost of borrowing funds. However, for a prepayment to prove beneficial, it must be timed well. A prepayment calculator can help you in this regard.
A prepayment calculator is an online tool that home loan borrowers can use to understand how a prepayment will impact their EMIs. Let us try and understand a bit more about this online tool.
What is a Prepayment Calculator?
When an individual prepay their home loan, the payment they make towards the loan amount essentially helps reduce the total loan amount. This, in turn, can lead to two things. In some cases, when a borrower prepays their loan, the lender acts by reducing the borrower’s loan EMIs. However, in certain cases, lenders do not reduce the loan EMIs but reduce the loan tenor.
A home loan prepayment calculator helps borrowers understand how their EMIs will change if they prepay a loan. Some home loan prepayment calculators also tell borrowers the total interest they will save by opting for prepayment, thereby allowing them to correctly assess whether a prepayment would indeed be the right choice for them.
Using a home loan prepayment calculator requires one to go through the following steps:
- Search the internet for a home loan prepayment calculator and choose one available on a reliable and trustworthy website.
- Next, enter the outstanding loan amount or the loan amount that is yet to be repaid.
- During the next step, enter the remaining tenor and after this, the rate of interest at which you are repaying your loan.
- Finally enter the loan amount that you wish to prepay.
Once you enter all of this information into the calculator, the home loan prepayment calculator will give you your new EMIs, thereby allowing you to easily calculate how much you will save on EMIs each month. Some home loan prepayment calculators also tell borrowers the money they will save by way of reduced interest payout if they choose to go for a home loan prepayment. Individuals on floating interest rates can prepay their loans at any point without paying any penalty. However, individuals on fixed interest rates must pay a prepayment and foreclosure penalty. Thus, individuals on fixed interest rates must prepay or foreclose their loan after ensuring that the money they will save by opting for a home loan balance transfer is much higher than the prepayment or foreclosure fee itself.
In a nutshell, here are the benefits of using a home loan prepayment calculator.
- A home loan prepayment calculator is very fast, which cannot be said about manual calculations. Thus, with this tool, borrowers can know in an instant if home loan prepayment would indeed be the right choice for them.
- It can be trusted to deliver accurate results every single time. Thus, the calculator is reliable, which is a key consideration when the loan amount involved is a hefty sum.
- Lastly, a home loan prepayment calculator helps borrowers save time and energy.
