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Factors You Need to Consider Before Foreclosing Your Home Loan

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  • Things You Need to Know Before Foreclosing Your Home Loan

  • Using a home loan foreclosure calculator

  • How to foreclose a home loan

Foreclosure of a loan means paying the full due amount in a single payment instead of repaying in multiple EMIs. It may be a wise decision to foreclose an existing home loan, as it can significantly reduce the burden of paying a hefty interest, as well as the overall cost of the property while preserving the value of the asset. Nevertheless, foreclosure of a home loan can also be a bit tricky, especially for those who are unaware or not familiar with the details of the procedure. Without proper knowledge and planning, the decision to foreclose a home loan could backfire.

What is Home Loan Balance Transfer and How Does Home Loan Balance Transfer Work?

The home loan balance transfer is a credit facility that allows the transfer of an active home loan amount to a different lender. This is possible when you do not like the disposition of your current lender or when it feels like you are paying a greater amount than EMI. The home loan balance transfer via Bajaj Housing Finance guarantees you a stress-free experience and what's needed is the information of your current home loans like the borrower’s name and exact loan amount to be moved between banks. 

Things You Need to Know Before Foreclosing Your Home Loan

Earlier, a foreclosure fee of 5% or more would be charged on the outstanding principal with a floating rate of interest. This made a prepayment of the home loan quite expensive. However, the 2021 Regulations of the Reserve Bank of India restricts any lender from charging fees for home loan foreclosure on a floating home loan interest rate. 

If the borrower has a home loan at a fixed interest rate, he/she may be charged 4% on the outstanding amount when foreclosing the loan. In such cases, it would be wise to choose a balance transfer with a reputed lender, who would provide the best interest and a top-up plan. With the option of a balance transfer, one may consider home loan foreclosure if there is a sudden cash inflow or huge savings in place. Before deciding, the following points must be kept in mind:

Weigh tax benefits

With a home loan comes tax benefits. Section 24 and Section 80C of the Income Tax Act allows tax deductions owing to the repayment of interest and principal, respectively. Foreclosure of a home loan would mean leaving behind all these benefits. Therefore, it would be wise to first map out one’s taxable income and see if there’s a possibility of claiming savings under different ITA sections in the absence of a housing loan. If there are alternatives to reduce taxable income, then one can surely go ahead with home loan foreclosure.

Keep an eye out on the EMIs

Your monthly income should meet your regular expenses, as well as desires. When planning a monthly budget, be sure to make a chunk of it go into savings and investments to bolster one’s finances. Keeping that in mind that the equated monthly instalments or EMIs should not exceed 40% of your monthly income. Selecting low EMIs can help save a big amount every month. In case the EMIs seem hefty and do not leave enough room for savings, one should consider foreclosing the home loan.

Calculating expenses in advance

It may be a good idea to keep track of all short-term and long-term expenditures before opting for home loan foreclosure. These should ideally include a retirement plan, children’s education, wedding, vacations, emergency contingencies etc. Foreclosure of a home loan should only be considered if the borrower has sufficient savings to fulfil these requirements.

Timing is the key

It is always advisable to plan in advance. This will help save funds for foreclosure and figure out how to utilize excess funds in a more organized manner instead of making hasty decisions. One of the smartest things to do is to make use of an Online Loan Repayment Calculator to monitor savings when going for foreclosure of a home loan. 

Evaluating investment areas

Instead of using money to foreclose a loan, an individual may consider investing the same. To decide which option is more lucrative, evaluate the projected returns from investment and compare them with the total interest outflow during the same time. Ideally, one should consider foreclosing if the interest obligations weigh more than investment earnings. 

Using a home loan foreclosure calculator

Using an online calculator is simple. All that is needed are the following details:

  • Loan amount
  • Interest rate
  • Tenor
  • Number of EMIs already paid
  • Foreclosure month – this refers to the month in the tenor when the entire amount is repaid in advance

For instance, if the loan tenor is 5 years i.e. 60 months, and the borrower plans to pay off all the remaining amount after 3 years and 4 months i.e. during the 40th month, then the 40th month is referred to as the foreclosure month. 

How to foreclose a home loan

The steps to foreclosing a home loan are as follows:

Inform the lender

Formal notice must be sent to the lender in advance to initiate the foreclosure procedure.

Get all the paperwork in place

All the paperwork – EMI payment receipts and loan agreement papers -- must be kept handy for verification to make sure the process goes on smoothly.

Assess all payments

The borrower should be present in-person to verify and assess all the documentation and payments.

Get a NOC

Getting a ‘No Objection Certificate’ from a bank or NBFC is crucial, as it states the borrower has made full payment and does not have any outstanding balance in his/her name. 

Remove lien on the property

After the foreclosure, the borrower will need to get the lien (if any) terminated to be able to sell the property.  

Retrieve security cheques

Be sure to retrieve any submitted post-dated security cheques from the lender once the home loan is closed.  

Get the Encumbrance Certificate

Following the home loan closure, one can get an Encumbrance Certificate stating all transactions made concerning the property in question. The EC also validates that the property is free of any legal or monetary liabilities.  

Collect all documents

Be sure to collect all necessary documents submitted at the time of the loan application.

Before you start the process of foreclosing your home loan, start researching the same - read about the benefits of foreclosure of home loans, and understand the detailed procedure. 

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