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Reduce your Home Loan EMI or Tenure? Which is more preferred?

Published On Jul 08 2024 6:47 AM 1 min read 2102 views 1903 Likes
Reduce your Home Loan EMI or Tenure? Which is more preferred?

When managing a home loan, one crucial decision borrowers often face is how to reduce their home loan tenure or EMI. This decision can significantly impact their financial health and long-term wealth-building strategy. To make an informed choice, it's essential to understand the implications of each option.

Understanding EMI and Home Loan Tenure

Home Loan EMI (Equated Monthly Instalments) are fixed monthly payments made to repay a loan within a specified tenure. They consist of both principal and interest components.

Home Loan tenure is the period over which the loan will be repaid. It is a critical factor in determining the total interest payable over the life of the loan.

Option 1: Reducing EMI

Pros:

  • Increased Monthly Savings: Reducing EMIs lowers your monthly financial burden, leaving you with more disposable income. This extra cash can be used for other investments, emergency funds, or lifestyle needs.
  • Improved Cash Flow: Lower EMIs can significantly improve your monthly cash flow, providing more flexibility, especially during uncertain economic or personal financial crises.
  • Easier Budget Management: Smaller EMIs make budgeting more accessible and less stressful, ensuring that other financial commitments can be met without strain.

Cons:

  • Longer Tenure: Reducing EMIs generally extends the loan tenure. While this eases short-term financial pressure, it increases the total interest paid over the loan period.
  • Higher Total Interest: With a more extended home loan repayment period, the interest component accumulates, resulting in a higher overall payment to the lender. This means that while your monthly outgoings are reduced, the long-term cost of the loan is higher.

Option 2: Reducing Tenure

Home Loan Prepayment process

Caption: Home Loan Prepayment process

Pros:

  • Lower Total Interest: Shortening the loan tenure reduces the total interest paid, making the loan cheaper in the long run. This is because the principal is repaid quickly, leading to a decrease in interest payments over time.
  • Faster Debt-Free Status: A shorter tenure means you become debt-free sooner, enhancing your financial security and enabling you to focus on other financial goals, such as retirement savings or other investments.
  • Improved Credit Score: Paying off your loan faster can positively impact your credit score, reflecting your financial discipline and creditworthiness.

Cons:

  • Higher EMIs: Shortening the tenure means higher EMIs, which can strain your monthly budget. It requires a steady and reliable income to manage the increased outgoings without affecting other financial commitments.
  • Reduced Disposable Income: Higher EMIs reduce your monthly disposable income, potentially limiting your ability to save or invest elsewhere. This can impact your financial flexibility and emergency fund management.

Factors to consider

Here are a few factors to consider when choosing between lower EMI or Loan Tenure -

  • Financial Stability: Evaluate your current economic stability. If you have a stable and high income, opting for a shorter tenure might be beneficial. Conversely, if you foresee financial instability or additional financial responsibilities, reducing EMIs could be wiser.
  • Future Financial Goals: Consider your long-term financial goals. If you aim to retire early or invest in another significant asset, reducing the loan tenure and becoming debt-free sooner might align better with your plans.
  • Interest Rates: The prevailing interest rates can also influence your decision. Reducing tenure to lock in lower rates might be advantageous if rates are expected to rise. Conversely, if rates are stable or expected to fall, lowering EMIs might be more beneficial.
  • Tax Benefits: Home loans offer tax benefits on principal repayment and interest payments. Assess how changes in EMI or tenure impact your tax benefits and overall tax planning strategy.

Home Loan EMI or Tenure - What to opt?

Home Loan Prepayment process

Caption: Home Loan Tenure

The choice between reducing EMI or tenure is subjective and depends on individual financial circumstances and goals. If your priority is immediate economic relief and improved cash flow, lowering EMIs may be the preferred option. However, reducing tenure is likely more advantageous if you aim for long-term savings and faster debt repayment. Go to the IIFL Home Loans page and submit an online loan application to learn about cheap home loan interest rates.

FAQs

Q1. How to reduce home loan tenure?

Ans:  

You can shorten the term of your home loan by paying off the principal early, refinancing your loan, applying bonus money to your EMIs, and other strategies. However, one should know the penalties associated with prepaying home loans. One can shorten the duration of a home loan by lowering the amount owed and the interest paid out. 

Q2. How to reduce the EMI of home loans?

Ans:  

Reducing the EMI of your home loan is a smart financial move that can significantly ease your monthly financial burden. One effective strategy is to opt for a longer loan tenure, which spreads the repayment over a more extended period, resulting in lower monthly instalments. Additionally, making a larger down payment at the outset can reduce your principal loan amount, directly impacting your EMI. 

Q3. Should a loan have a specific duration?

Ans:  

Selecting a shorter loan term can help you reduce interest costs throughout the loan and assist in paying off debt. You can adjust the length of your home loan even if you choose a longer-term but would want to pay it off sooner, or vice versa. 

Q4. In 2024, would interest rates on house loans decrease?

Ans:  

Based on current rates, interest rates for houses are expected to drop by 0.5% to 1.25%. Current house loan holders might benefit more from the decline. 

Q5. How is the after-prepayment EMI calculated?

Ans:  

Utilise a home loan EMI calculator with prepayment to determine the EMI that will be lowered upon prepayment. Enter your loan information, including the prepayment amount, to utilise this tool. Your new EMI will be shown by the calculator using the lowered principal.

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