There is a dizzying range of loans available to borrowers today. But the two loans that generally confuse people the most are home loans and mortgage loans. While home loans provide funding to help the borrowers construct, or buy a residential property, mortgage loans are taken against a property collateral — it is a loan against properties. In case of home loans, the loan applicant does not own a property and is about to purchase it.
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There are many ways through which borrowers can reduce the burden of a mortgage loan. Here are some tips:
Increase the EMI
This is the most common tactic for clearing off any kind of loan.
"Increasing the EMI amount by 10-15 percent tends to fast-track the loan tenure. Alternatively, making a lump sum payment can significantly lower the cost of the loan," Jairam Sridharan, MD at Piramal Finance, told CNBC-TV18.com.
Prepay a loan amount
Prepaying a mortgage loan can offset much of the interest burden.
For instance, if a loan of Rs 50 lakh has a loan term of 20 years and an 8 percent interest rate, the monthly EMI would roughly be Rs 43,000 with Rs 1.03 crore in principal and interest. If one was to pay an additional Rs 6,000-Rs 7,000 a month which drops the loan tenure by about three years, one can save over Rs 15 lakh in interest alone," Sridharan said.
In the long run, this method helps in saving anywhere between thousands to lakhs of rupees in interest while paying off the loan faster.
Maximise on windfall gains
A sudden and unexpected gain in income is often referred to as windfall gains. This includes gains received from inheriting property, unexpected addition in income and even bonuses.
Using these gains to pay off debt is a smart decision as it reduces financial liability on the borrower’s part.
Refinance the mortgage
As per Sridharan, by refinancing a mortgage, one is essentially swapping out the existing mortgage for a new one. The newer mortgage taken essentially has a lower interest rate that allows for lower monthly payments. This option is available to those who have a strong credit score and a clean track record.
Before refinancing, it’s important to conduct thorough research on closing cost fees and other related expenses.
Use existing investments
Investment dividends like proceeds from mutual funds and other bonds can be used to pay off debt, when one is in need of financial help. Another option is borrowing against one’s insurance schemes and/or PPF. Using existing investments should be considered when the financial future looks uncertain.
