Home Loan Pre-payment: A Wise Financial Decision, Doubling Your Benefits
In today’s day and age, acquiring a home has become relatively easy, primarily due to the accessibility of home loans. Especially for employed individuals, taking a loan and purchasing a flat is a common practice. However, after some time, borrowers often find themselves distressed when faced with the loan amount and tenure. Typically, people opt for a 20-year home loan tenure, and it’s natural for them to want to repay it as soon as possible.
The desire to be debt-free is universal. Hence, many borrowers consider options like Home Loan Pre-payment to expedite their loan clearance. But a closer look at the financial calculations reveals that opting for pre-payment might not always be the best choice. By reading this article, you’ll be better equipped to decide whether to choose the pre-payment option or to explore alternative investment avenues.
Understanding Home Loan Pre-payment
Most individuals, especially salary earners, are often eager to close their loan accounts. They eagerly await an opportunity to deposit any windfall gains from old investments or lump-sum payments into their home loan accounts to expedite the loan repayment process. However, choosing to invest this surplus amount elsewhere can often yield better returns than pre-paying the home loan.
Benefits of Home Loan:
Before hastily deciding on home loan pre-payment, it’s crucial to assess whether the desire to repay the loan quickly stems from genuine financial concerns or mere anxiety. Reflecting on whether this fear is grounded in reality, such as job security concerns, and then opting for the most prudent financial path is advisable. Especially considering long-term investments like Mutual Funds could be more beneficial.
Tax Benefits of Home Loan:
One significant advantage of a home loan is the tax benefits it offers. Tax deductions are available on both the interest and principal components of the loan repayment. Under Section 24(b) of the Income Tax Act, borrowers can claim a deduction of up to Rs 2 lakh on the interest paid towards the home loan. Additionally, Section 80C allows a deduction of up to Rs 1.5 lakh on the principal repayment.
Consider Investment Avenues:
By initiating a systematic investment plan (SIP) equivalent to 10% of your EMI, you can recover your entire EMI amount over time. However, for this strategy to work optimally, careful selection of Mutual Funds is essential.
Financial Calculation:
For instance, if you’ve taken a Rs 50 lakh home loan for 20 years with an annual interest rate of 8.70%, your monthly EMI would amount to Rs 44,026. By investing Rs 4,400 monthly in SIP for 20 years, you could accumulate returns of Rs 66,70,202 at a 15% annual interest rate.
Conclusion:
Considering these financial calculations, it becomes evident that opting for pre-payment might not always be the most prudent choice. By strategically investing surplus funds in alternative avenues like Mutual Funds, you can potentially reap greater returns and secure your financial future. Therefore, it’s crucial not to rush into home loan pre-payment decisions but to carefully evaluate your financial goals and investment options.
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