Smart Financial Moves with a Home Loan Prepayment Calculator

The home loan tenor can stretch up to 40 years. However, most borrowers make their best effort to close the loan and become debt-free before the originally planned loan date. In this regard, prepayments can prove to be a very effective strategy. 

Prepayment refers to when a home loan borrower reduces the principal amount by making a lump sum payment. The latest RBI rules have made it possible for home loan borrowers on floating interest rates to prepay their loans without paying any penalty. However, borrowers repaying their home loans on fixed interest rates can be charged a prepayment penalty

Prepayments are an excellent tool if one desires to become debt-free quickly. Borrowers must thus use income from investments, share sales, salary hikes, promotions and bonuses to make prepayments and reduce their loan tenor. 

Borrowers aiming to become debt-free before the agreed loan tenor must know that they can use a home loan prepayment calculator to get a clear picture of how a prepayment will affect their loan EMI and loan tenor. In this article, we discuss this online powerful tool and everything you must know about it.

Home Loan Prepayment Calculators: What Are They and How Do They Work? 

A home loan prepayment calculator is an online tool that lets you understand how a prepayment will affect your EMIs, overall loan tenor and the total interest payout on your loan. These calculators are easily available on the Internet and are also fairly easy to use. 

Here is how a home loan prepayment calculator works. 

  1. Enter the original loan amount.
  2. Enter the original loan tenor. 
  3. Next, the home loan prepayment calculator will prompt you to enter the rate of interest at which you are currently repaying your home loan. 
  4. After this, enter your prepayment amount. 

Once you enter these details, you will be able to see on the output page your current EMIs, your new EMIs and the total money you will save in terms of the total payout on the loan if you opt for the discussed prepayment amount.  

Home loan borrowers must however keep in mind that the home loan prepayment calculator has certain limitations. For instance, it does not take into account any penalty or late fees that you may have to pay along the way that will directly impact the interest payout on your loan. Similarly, the home loan prepayment calculator works on the assumption that you will continue to pay the same EMIs through the tenor of the loan. One must keep these shortcomings in mind while using the home loan prepayment calculator. 

Now that we know the basics of a home loan prepayment calculator and are familiar with the workings of this tool, let us look at the benefits associated with home loan prepayment. 

Benefits of Home Loan Prepayment

Here is why home loan borrowers must plan home loan prepayment. 

  1. Home loan prepayments help reduce the principal amount. Thus, when you prepay a loan, you give yourself a chance to reduce the interest payout on your loan and therefore, the cost of borrowing. This also allows borrowers to enjoy a better return on their investment.
  2. Home loans are a safe and convenient way of affording your dream home or investing in the real estate sector. However, long-tenor loans can be burdensome, especially if you are dealing with a strict financial budget. Prepayments help borrowers become debt-free before the agreed period. 
  3. Prepayments either lead to lower EMIs or a shorter loan tenor. When a home loan prepayment translates into low EMIs, the purchasing power of the borrower expands, allowing them to afford a better lifestyle. 
  4. Sometimes, prepaying your loan can have a positive impact on your credit score. This is important as a high credit score gives one access to easy credit and terms and conditions that are highly favourable to the borrower. 

Home Loan Prepayment Calculator FAQs

  1. Who is eligible for home loan prepayment? 

Anyone who can afford to make a prepayment is eligible for home loan prepayment. 

  1. Is the home loan prepayment calculator the same as the home loan EMI calculator? 

No. While a home loan EMI calculator helps one figure out their EMIs for the preferred combination of loan tenor and loan value, a home loan prepayment calculator tells a borrower how a prepayment will affect their EMIs and the total amount that they will save through a loan prepayment. 

  1. Is the home loan prepayment calculator chargeable? 

No, one need not pay any fee to use a home loan prepayment calculator. This tool is free to use. 

  1. What are some other ways to become debt-free quickly and reduce the effective interest outgo on one’s home loan? 

If you are currently repaying a home loan, you can reduce the total interest outgo and become debt-free quickly by opting for a home loan balance transfer. 

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