Can Preclosing Your Home Loan Help You Save Money?

Preclosing a home loan, in simple terms, means paying off your home loan before the term of the mortgage is done. This can be done for various reasons such as refinancing, saving on interest, etc. Sometimes a borrower can refinance his/her housing loan with another bank merely because they willing to provide a lower rate of interest on the loan than the bank that the borrower is currently indebted to. In this case, the borrower simply applies for a loan in a desired bank, and upon approval, the bank pays off the existing loan in full, thereby allowing the borrower to avail a home loan with a lowered interest rate. A borrower can also preclose a housing loan to save on interest. Closing off a loan before the term is due allows the borrower to evade a part of the interest. Any interest he/she was supposed to pay post preclosure will automatically be waived off on closing the loan. However, one must take into consideration the preclosing charges that a bank may charge before preclosing. Sometimes, it would not make sense to preclose the loan if the charges levied on preclosure exceed the amount that can be saved by paying off the loan in full. Banks usually dispirit borrowers to prepay housing loans as the borrower would end up repaying lesser to the bank than if he/she had to finish off the entire tenure of the loan. This is why a bank or lender usually charges a preclosure fee. Thing to remember during preclosure

• Collecting the documents – While applying for the housing loan, original documents of the property must be handed over to the bank. These documents must be collected back from the bank on closure of the loan.
• Collecting the No Objection Certificate – The No Objection Certificate or NOC is a statement by the bank acknowledging that you have paid all your dues.
• Update your credit score – Once the loan has been closed, you need to request the bank to update your credit score. This will help you avail loans easily in future.
• Don’t forget to carry your government-issued identification card. This is of utmost importance in order to close off a loan.
• A chequebook must also be kept handy as you may need to pay the final settlement of the housing loan.
• An acknowledgement of the payment made towards the loan must be taken from the bank. This must be duly stamped and signed by an authorized bank official.

Demerits of preclosing a home loan

• A charge is levied on preclosure. And in the event that the penalty on preclosure exceeds the interest saved on the loan, it becomes irrational to preclose the loan.
• Preclosing a housing loan means that you lose a big chunk of money in one go. This can be beneficial in saving interest but becomes a burden to an individual as he/she loses out on a lot of money instantly, often damaging the lifestyle of that person.

In conclusion, prepaying a loan can help save some money. However, it must be done after careful calculation, as sometimes it may very well be that you are not saving any money. Also, the lump sum outflow of money can be a detriment to a person’s lifestyle and daily requirements.