Repaying a loan is quite a burdensome obligation, especially when it comes to a home loan. This is because housing loans are high-value loans taken for a longer period, and a huge amount of interest is paid over the loan tenure.
Hence, a loan with exorbitant interest can have an impact on your financial stability and mental well-being. Therefore, planning and trying to reduce your interest rates is essential. This enables you to repay your loan quickly and effectively without ever feeling stressed.
Ways To Smartly Reduce Your Home Loan Interest Rates
Before applying for a mortgage loan, there are a few things you should keep in mind. The first is the qualifying requirements, which are determined by your income and ability to repay. The mortgage cost, which comprises administrative costs, processing fees, prepayment fees, etc., is the other important consideration. Another crucial factor is the duration of your house loan, which can be approved for up to 30 years.
A home loan has many tax benefits. However, because home loan interest rates are higher, you can end up paying more EMIs. Changes in interest rates have an immediate impact on loans. Hence, the following factors must be considered to lower your interest rates.
1) Shorter Tenure:
The loan term is the main factor determining the interest. Longer tenures reduce the EMIs, while shorter tenures can assist in lowering the total interest amount that must be paid. A home loan interest rate calculator will show how interest rates can be reduced with shorter loan tenure. Hence, choose a tenure that can help in reducing the interest rates.
2) Prepayment:
Prepaying the loan is one of the best strategies to reduce loan interest costs and save money. If the rate of interest is floating, the borrower need not pay any pre-closure fees on loan prepayments.
Regularly making extra payments will considerably lessen the principal balance and, thus, the overall interest. However, lenders impose a fee for the prepayment of fixed-rate loans. Hence, check with the lender what type of interest you are being charged.
3) Down Payment:
Most home lenders generally finance between 75% and 90% of the total property value. The balance amount the borrower must contribute. Hence, it is best to pay more down payment rather than paying the least amount. The loan amount will be smaller if you pay more upfront, which reduces the interest you must pay.
4) Credit Score:
The CIBIL/credit score depicts your credibility and responsibility towards your previous or existing debts. A 750 plus score is regarded as very positive, and lenders consider you as a financially sound, reliable borrower with lower risk and offer better loan terms, especially concessional interest rates.
5) Home Loan Balance Transfer:
While current home loan borrowers opting for floating interest rates do benefit from rate decreases, most financial institutions offer refinancing loans or a loan balance transfer at reduced interest rates.
Transferring the outstanding amount to a lender offering reduced interest rates is an option you can consider if the rate your present lender charges is higher. Apart from saving money through lower interest rates, a borrower also gains from improved features like tenure extension or reduction, which ultimately influences the monthly home loan instalment.
6) Compare Interest Rates:
Before choosing a loan, conduct in-depth research and compare rates. You can get a clearer idea of the interest rates and other fees of various lenders by visiting one of the many third-party websites available. It is, therefore, best to compare the interest rates on loans offered by all banks before settling on a certain bank.
7) Increase EMI:
Some lenders provide you with the option to change your instalment once a year. Therefore, if you have changed jobs and received higher pay, you can always choose higher EMIs to shorten the tenure. Additionally, once the tenure is shortened, the total interest you must pay on your loan will decrease significantly.
8) Floating Interest Rates:
Despite being set by the government, the interest rate on house loans differs amongst lenders. The majority of lenders provide both fixed and floating interest rates. A fixed rate does not change during the loan term, while a floating interest rate is adjusted every quarter in response to multiple economic factors.
Fixed rates often cost 1% to 2% more than floating rates. Loans with adjustable rates are more affordable. Therefore, choose a floating-interest loan if you anticipate a decline in rates and wish to reduce your interest expense in the near future.
Conclusion
When it comes to getting your dream home, a home loan is a blessing. Even if your EMIs appear reasonable, the high interest might nearly double the value of your loan. To increase your savings at the end of the day, a wise financial strategy would include reducing the interest paid on the house loan EMI.
There are many strategies to lower your EMI and lower the amount of interest you pay on your home loan. Opt for one or more of the aforementioned alternatives to lower the interest paid on your loan.