A home loan is something that someone can get at a low interest rate. But we might get curious to prepay the home loan so that we can stay debt free. Many financial experts say that they build their financial empire only with the help of debt and not with the money they earn. This is very true. We cannot become rich with only the money that we earn with our hard work. We also have to be very smart to make the right investments at the right time to grow our money.
I was checking this for myself. I currently have a home loan and I'm paying an interest of 8.4 percent. One big problem with a home loan is that they start taking your interest during the early years and gradually start adjusting the money in the principle. So if we don't pay more money during the early stages of our home loan tenure, we might end up paying a lot of interest during the later stage. This is a strategy the banks here are using to get benefit out of home loans.
In India, based on the tax regime we choose, we have an option to get a tax exemption on the interest paid for Home loans. That is one of the primary reasons why people want to hold their home loans even if they have enough money to pay it off. Some financial experts say that it is good to invest on some things that can provide a greater yield or greater interest instead of using the money to prepay the loan. Sometimes we might get lump sum amount and we might be interested to push it to our loan. If we want to be debt free, this is the best strategy, but additionally, we have to also understand that nobody gives us loans for cheaper interest than the home loan people. If we go for a personal loan or other type of loan, interest rates are very high.
One way having a huge loan can become a big burden for us. But currently the interest rate is 8.4 percent per annum. A simple FD provides 7.1 percent interest on our investments. So if we plan and try to push the extra money that we can get from the 7.1 percent interest, ultimately we would have double the amount of money. I understand that we can become debt free sooner if we pay the full amount in the bank. But keeping the same amount in the bank or an investment can provide a better outcome compared to that of paying off the loan as soon as possible.
We can reduce the interest if we do a part payment. But if we can generate either more interest or the same interest from other investments, then we don't have to worry about the high interest in our Home loan. This is a good strategy I believe, because it will keep pushing us more towards generating wealth than repaying our debt. This also gives another advantage where our hard-earned money will still stay in the bank and will start generating passive income for us.
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