Home loans are one of the biggest burdens in our lives. It will be very nice to invest in our dream home but when it comes to finishing off the loan, it can be a huge effort. But the reality is that if we don't close the loan as soon as possible, we might have to pay 2 times that of the value to the bank as interest. This is not a good thing financially. It is better not to fall into the trap of purchasing a house or plan everything perfectly.
Variable interest rates
This is the biggest problem. Many people don't even notice. Mostly in the first year, there will be no changes to the interest rates. But as the years keep increasing, the interest rates can vary. Based on the repo rate the RBI is setting, the interest percentage value will also keep changing. This is when the loan can start playing some trick games with us. We know it is hard to spend a lot of money and effort in closing off the loan.
Sometimes as per the RBI guidelines in India, there can be cases where the interest rates get reduced. The banks don't usually auto-apply the new percentage on our loan account. In such cases, we have to request a letter to the bank to reduce the loan percentage. This is a manual activity. The reason why the banks don't do it automatically is because they want that additional interest that they are paying. We cannot argue with the bank that they should be doing this automatically.
Paying extra every month
The best strategy to close off a Home loan is by paying extra money every month. Apart from the regular amount we pay for the EMI every month, it can be a good practice to push an additional amount to the loan account. Some banks offer easy calculations and they reduce the excess amount from the principal of the loan which is a great thing. Some banks also have charges if we have to do a pre-closure or a part payment. Since many banks have come up with competitive options, it has now become easy to pay extra and reduce the burden.
Longest tenure
Having the longest tenure in our loan is a good thing. I have done that too. The reason is that this reduces the EMI amount we have to pay every month. At the same time this also gives us a facility where if we pay extra money every month, that extra money is adjusted in the principal of the loan.
It is not mandatory that we have to complete the full tenure to pay off the loan. If we are okay we can even pay the money as soon as possible and get our documents from the bank account. It is always better to close off the Home loan by paying an extra amount apart from the EMI amount. The main reason is that we can reduce the interest we are paying to the bank and the second reason is that we can avoid paying a lot of extra money because of the increase in the interest rates.
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