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Foreclosing a home loan maybe a better options

Discussion in 'Money Matters' started by Shanvy, Nov 12, 2007.

  1. Shanvy

    Shanvy IL Hall of Fame

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    In 2004, housing loan was available for 7.5 per cent floating rate. The same has now gone up to to 12 per cent. The question every borrower is facing is whether he or she should partially foreclose the account. What will be the possible savings?
    For example, if one had borrowed Rs. 20 lakhs at 7.5 per cent interest for a term of 10 years, the EMI is about Rs.23, 471.
    Now, the interest rate has gone up to 11.75 per cent and the EMI is 28,406. If he has saved Rs 5 lakhs in the last three years through other sources, would it be better that he pays Rs. 5 lakhs towards the loan? Let us work out the options.
    By paying Rs. 5 lakhs towards the loan, the EMI would come down to Rs.21,305.
    This would fetch him a monthly saving of Rs.7, 101 towards EMI.
    If he were to invest Rs 5 lakhs in other deposits, it would fetch him only Rs 4,125 per month at 10 per cent interest.
    It would be advantageous to pay Rs. 5 lakhs towards the loan and reduce the liability.

    (courtesy the hindu)

    Recently was talking to my banker regarding the same...he guided me saying that, prepayments,part payments really help..as it is taken against the principal and thus the term and your principal reduces.

    He also advised that though, the transfer of loan from one bank to another looks good, there is always penalty if you are taking the loan else where, and also the new processing fees. unless the new interest rate is very very low compared to what you are now paying...the shift is not advisable..as in the long run, the other bank will also be forced to change the interest rates after a 6 months run.....


    It was beneficial to me...hope it is for some of you....















     
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  2. srilu

    srilu New IL'ite

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    Hi Shan,
    It is very useful info,
    But whart do u feel if we take home loan what ever we do the saving we have to pay the bank to reduce the loan amount or do we have to invest in others or partially we can pay the home loan and partially we can invest on others?
    how it should be?
     
  3. Shanvy

    Shanvy IL Hall of Fame

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    HI Srilu,

    Though i am may not be the right person to ask this question, as far as my experience goes, don't park all your savings to pay the home loans. Always have an emergency fund...(which i learnt the hard way.)..then your investments...then homeloans...and if you do have excess from after and from your investments, it is always better to pay of a principal...

    (I am saying this i recently paid a small part towards the principal..and you will not believe my term reduced by 3 years.)

    trust this is useful.....
     
  4. subbutr

    subbutr Senior IL'ite

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    Very True, our dear Shanvy.

    The earlier closure of any loans relieves the borrower's burdens and interest on the Loan amount.

    The more we delay, we pay more interest...why to carry such debts.

    Subbu
     
  5. Shanvy

    Shanvy IL Hall of Fame

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    hi subbu sir,

    Thanks for confirming my opinion...
     
  6. srilu

    srilu New IL'ite

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  7. Shanvy

    Shanvy IL Hall of Fame

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    srilu,


    You are welcome...
     
  8. Abha

    Abha Bronze IL'ite

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    Hi Shanvy

    I'm actually too young and, just got married last year ...havent got into these things yet... but i'm still quite interested to know, have been watching the interest rates and they are touching the sky, i mean if we take a loan of 30 lakhs, we end up paying 60 something back to the bank, wich just makes me crazzzyyy ...

    what you are syaing here is that, you paid a substantial amount towards your home loan, and that reduced your loan term by 3 years ? i have heard that there are limitations to that as well... like the bank says that in one year you cant pay more than one particular amount... wich is like even if you have the money they wint let you pay as their interest is being cut... can you calrify his point please for me ?

    we havent taken any loan yet, but when i think of it, it sounds like such a huge committment, it is like for the next 20 years you are paying towards it and ohh god, i'm getting goosebumps already...

    ~Abha
     
  9. Shanvy

    Shanvy IL Hall of Fame

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    Here, when you take a loan of floating rate of interest, there is no prepayment penalty,(it is a and you can pay every month also...against the principal that is what my banker told me..

    what you are saying is for the fixed rate...where you can pay a certain amount, and reduce your principal..but you have a percentage to be paid as penalty..but here also you reduce your principal..

    housing loans are different than regular personal loans. yes..you end up paying more than double.....:shock:
     
  10. Abha

    Abha Bronze IL'ite

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    Hi

    Thanks shanvy for clarifying, you are saying "Here"... we are also form there yaar... this US isnt ourss... India is our country...

    I have seen quite a decline in the rates of property cos of the increase in the rate of interest, in the bangalore area, it mite be the same throughout the country...

    ~Abha
     

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