How does prepayment of home loan works?

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How does prepayment of home loan works?

Karishma

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Home Loan Balance Transfer

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Prepaying a home loan means paying back a portion or the entire loan amount earlier than scheduled using surplus funds. This can be done to reduce your Equated Monthly Installment (EMI) and shorten your loan tenure. Generally, the prepayment amount needs to be at least three times your existing EMI. Lenders may charge a prepayment penalty, which cannot exceed the amount specified in your loan agreement and must be at a fixed rate. However, if your loan has a floating interest rate, banks are typically not allowed to charge a penalty for prepayment. Housing Finance Companies (HFCs) may charge a penalty if you are prepaying by taking a new loan from them or another financial institution. If you prepay without taking another loan, no penalty is usually applicable.

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Aaryan · Answer 1 · 2022-03-16T10:42:30+00:00

Aaryan

0 March 16, 2022

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While taking home loans we come across new terms such as prepayment, foreclosure, loan disbursement etc. Let me explain what home loan prepayment is and how it works. At times, banks and RBI change the guidelines and the interest rates drop but it's not that easy to opt for a loan with lower interest rate after applying for it and paying interest for months. But this doesn't mean that opting for a home loan with a lower interest rate is impossible. So, this is where we come across the term prepayment of home loan.

To opt for a loan with lower interest rate and flexible facilities you can prepay the loan you are already paying interest for. In simple words, paying loans early with the surplus cash you have with you. With prepayment of home loan, you can reduce your EMI and at the same time reduce your tenure.

Generally, the prepayment amount is a minimum of three times that of the existing home EMI. At times, you may need to pay a penalty fee for prepayment of home loan.