It never
seems it will never close out, ever!!! you would know what I am talking about if you
have a home loan against your name. The outstanding amount never seems to
diminish causing lot of “house induced heartburn”. Please read on, If you can
take some head ache along with the burn.
As an example, If
you got a home loan of Rs.30 Lakhs at 10% interest for a period of 20 years
(EMI of Rs.29,000), the total amount you would have paid at the end of 20 years
is Rs 69.5 Lakhs.Yes you read it right …The total amount you would have paid is
more than double the loan. This is due to the interest component of the loan.
On the other
hand, If you got the same loan of Rs.30 Lakhs at 10% interest for a period of
10 years(EMI of Rs.40000),the total amount you would have paid at the end of 10
years is Rs.47.5 Lakhs. Yes you read it right again…Not only you would have got
the home under your name in 10 years but also saved a whopping amount of 22 Lakhs that
would have gone in as the Interest to the bank.
So when it
comes to big loans such as the Home loan, remember the adage Time is Money. So pay it off as quickly
as you can. Following are the tricks to get out of the “Honey,No money” excuse
Make
repayments at a higher rate:
A good way to get ahead of your mortgage commitments is to pay it off as if you have a higher rate of interest. Get a loan at the lowest interest rate you can and add 2 or 3 points to your repayment amount. So if you have a loan at about 10 percent and pay it off at 12 per cent, you won't even notice if rates go up. Best of all, you'll be paying off your loan quicker and saving yourself a packet.
A good way to get ahead of your mortgage commitments is to pay it off as if you have a higher rate of interest. Get a loan at the lowest interest rate you can and add 2 or 3 points to your repayment amount. So if you have a loan at about 10 percent and pay it off at 12 per cent, you won't even notice if rates go up. Best of all, you'll be paying off your loan quicker and saving yourself a packet.
Redirect all the cash towards the loan:
Be
it a small or large, redirect the excess cash that you would have access towards paying the loan. For the above case
study, even an extra payment of Rs.2000 on top of your EMI can save as much as 6
lakhs on your total amount. You may say excess cash is like the desert mirage.
Yes,I agree…but if you would forego some minor luxuries of life like not
eating out too often or buying gadgets
at will, I bet you would get a decent access
to cash. Think that these were the unwritten clauses you signed for in the home
loan application !!!
As
ironic as it may seem, it turns out that only solution to see the debt melt is to find more cash and you
needed me to tell that. Sometimes the truth is so simple and yet so harsh. I
have got to leave here to see if I can find some cash in the cupboard…
Comments
Nanda here.
Reading the posts starting with the latest, so there might be more comments in the days to come. I am notorious for comments which are longer than the posts :-).
On this home loan stuff, my belief too is that it makes more sense to not just pay off quickly but also keep the initial loan amount as low as possible. The problem with the repayment period though is that you need that aggressive mindset and decision-making to stretch to pay those extra 2K bucks before you take the loan. Otherwise, there's always the 2% charge for pre-closing the loan when you realize much later you have capacity to pay more than you actually thought possible. Very often, even with the 2% surcharge, the deal turns out to be more economical than keeping the loan open.
Strange how it is justified for the bank to charge you money for repaying late and early as well. The bank's argument seems to be "Oh well, I had planned until so-and-so date for returns on money invested with you, and I am losing that now." But then,the it's not like the bank cannot re-invest that money and give somebody else a loan. So, a bit strange to me. There's a lot more to it, but that's for some other time.
Nanda
P.S: There's a way to keep the heart burn down; if you by chance had control over how much EMI you could pay as long as you agreed to pay the minimum specified. As in, say you need to pay 29000 but could pay upwards based on your ability. We will discuss sometime about one of my more interesting experiences with one of the banks.