Foreclosing Your Home Loan? Keep These 5 Things in Mind!

Being able to foreclose a loan is no less than an achievement. It means that you have paid the loan faster and saved a lot of your hard-earned money. However, foreclosing your loan should not be a haste decision. For foreclosing, you might have to draw a significant amount from your savings. Therefore, you must consider certain factors before you decide to prepay your home loan.

Here are certain things to keep in mind before you foreclose your loan:

  • Letting go of the tax benefits

Home loans help you avail tax benefits on your interest and principal repayment. If you foreclose the loan, you would have to forgo them too. Are you ready for that? If the tax benefits are substantial and are helping you save a considerable amount of taxes, you might want to weigh the benefit of foreclosing again. You can calculate your taxable income and then check if you have other sources of tax savings under the Income Tax Act, 1961, to substitute the home loan tax benefit.

  • The opportunity cost of the funds

Before using your savings to foreclose the loan, you must consider the loss of the opportunity cost from those funds. Calculate the amount of returns you would earn if you invest those funds instead. You might need to weigh the difference between the interest on a home loan and the projected returns from the invested amount. If your interest is higher than the investment earnings, it could be better to foreclose the loan.

  • Best time of foreclosure

You must do some planning before you foreclose the loan. It might be a good idea to foreclose the loan if the investment returns are relatively low in the market. You can then save on the interest cost, as there could be fewer chances of earning high investment returns.

  • Cost of foreclosing

You might have to pay some charges for foreclosing the home loan. Therefore, you must consider the total cost of foreclosing the loan before making the decision. Also, if you have other loans that have higher interest rates, it could be a better idea to repay them first. 

  • Other financial goals

It is vital that after foreclosing the loan, you have enough funds to meet your other financial goals. Typically, it is possible to meet other goals while paying home loan EMIs. However, you might not have substantial funds after foreclosing the loan. You must list your current and future expenses like children’s education, wedding, your retirement, etc., and check if you will have funds to meet them after prepayment. Your decision should not lead you to a financial crunch in future. 

Foreclosing the loan could feel like relieving yourself of a heavy burden from your shoulders. However, you must weigh all the factors and have a farsighted approach while foreclosing the loan. Also, once you do decide to foreclose, you must ensure to follow the required procedural guidelines like obtaining the necessary documents and NOC from the lender to avoid any inconvenience in future.

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