[jaysmokesleaves]

I dont know about the calculations but I will say this; if you can afford to prepay it. Do it!!
The feeling of not having to pay an EMI is better than the calculations. The "feel", is the calculation. All the calculator gurus might differ, but thats my 1 cent.

[vivekiny2k]

Originally Posted by mjothi

+1.

All the institutions collect EMI with most portion going to interest. So, if you have been paying EMI for years (say 2 ro 3 yrs in case of 10yrs loan period), you would have paid interest upfront. So, why not utilize the money rather than paying back to bank?

it's simple calculation actually. you pay more interest because you owe more initially. you pay less later because you owe less. to figure out how much you pay in total, refer to loan amortization in the other thread about living on the edge.

Here is another angle that might interest you. As you pay your loan, you increase your ownership in the home. Here in US people sell that as "home equity" to get more cash. so at any point they own no home, and die with no significant assets.

in other words, use all you have while you are alive. We Indians have a tendency to leave a home for our children and will never do this.

another cool thing I have found is interest lock. my interest rate is locked at 5.25. if it goes down, i can refinance (for a cost). if it goes up, i still maintain my rate. I know nothing about how it happens in india, so take my comments with some salt.

[Johnny_]

Originally Posted by ntomer

I faced a similar predicament last year. I have an outstanding of about 10L on my current home and have that much cash. After thinking long and hard, I decided against pre-paying that loan and instead made the down-payment on another home.

I am hopeful that within 3-4 year, my investment will be more than doubled and it'll be much more than what I could have saved in interest.

My two cents :-)

Nitin

This is what i read in the book, Rich Dad, Poor Dad.

[phamilyman]

Sorry to pin prick your bubble but the only thing this hypothesis misses out on, is risk. On paper, we can take on unlimited leverage. In the real world, family will fall sick, accidents will happen, people will lose their jobs.

And the peace of mind of a reduced EMI (and hence lesser fixed costs) does have a value.

PS: Ofc, if the amount is insignificant compared to your annual take home, or you have a cash generating business,the above doesnt apply!

[tacho]

This is way too complicated for me but I want to know what the OP meant by RD. I've heard of Fixed Deposit before, but RD?

[ntomer]

Originally Posted by phamilyman

Sorry to pin prick your bubble but the only thing this hypothesis misses out on, is risk. On paper, we can take on unlimited leverage. In the real world, family will fall sick, accidents will happen, people will lose their jobs.

And the peace of mind of a reduced EMI (and hence lesser fixed costs) does have a value.

PS: Ofc, if the amount is insignificant compared to your annual take home, or you have a cash generating business,the above doesnt apply!

Thanks for the good advice buddy; but there are ways you can plan for these contingencies too. I have sizable medical insurance (6 lakh Gold cover for my family) and even more sizable accidental insurance (almost 75L - which my family will get in case of my accidental death). And in case of a job loss, I would be adequately covered by PF, gratuity, notice money etc and will be able to sustain similar lifestyle (including additional EMIs) for 1.5-2 years easily.

Thus I feel I am adequately covered and ready to take this risk. Of course you have a point when you say that a reduced EMI does bring peace of mind; but in my case watching my investments grow would be more satisfying :-)

Whadayasay?

Nitin

[rohan_iitr]

Originally Posted by phamilyman

Sorry to pin prick your bubble but the only thing this hypothesis misses out on, is risk. On paper, we can take on unlimited leverage. In the real world, family will fall sick, accidents will happen, people will lose their jobs.

And the peace of mind of a reduced EMI (and hence lesser fixed costs) does have a value.

PS: Ofc, if the amount is insignificant compared to your annual take home, or you have a cash generating business,the above doesnt apply!

In case of an emergency (sickness/accident), having surplus cash with you would give you more confidence and peace of mind, rather than having spent that cash to pre-pay the loan for reducing EMI.

@ OP, when the home loan is paid back by the borrower, the interest component is higher in the early years. Once you have already done the hard work of paying the interest, it is now time for you to reap the benefits by paying mostly towards the principal.

After paying off a significant portion of the interest, why would you want to pay back all principal earlier than required ?

If you have surplus cash, invest elsewhere (Gold, plot, mutual funds, FD etc). They will also give good returns.

Rohan

[Abhay]

Originally Posted by phamilyman

Abhay - that is numerically true. However, tomorrow there may be an accident, there may be ill parents, you may lose your job. Do you still want to have a large fixed monthly outgo?

phamilyman, perhaps you did not read my post right. That advice of not pre/part paying my loan was given to me by a CA but I did not take it!
We did some part payment and finally last year we fully paid up the outstanding amount. In the uncertain job market, even if I lose my job today atleast I do not have to pay a single rupee per month to stay in my own home. That was the rationale behind it :=)

edit: to jaysmokesleaves *thumbs up*

[benbsb29]

Originally Posted by jaysmokesleaves

I dont know about the calculations but I will say this; if you can afford to prepay it. Do it!!
The feeling of not having to pay an EMI is better than the calculations. The "feel", is the calculation. All the calculator gurus might differ, but thats my 1 cent.

Originally Posted by Abhay

In the uncertain job market, even if I lose my job today atleast I do not have to pay a single rupee per month to stay in my own home. That was the rationale behind it :=)

Well said, guys! Abhay has summed up what i felt as well, quite brilliantly!

[mjothi]

Originally Posted by vivekiny2k

it's simple calculation actually. you pay more interest because you owe more initially. you pay less later because you owe less. to figure out how much you pay in total, refer to loan amortization in the other thread about living on the edge.

You are right. I mean the same. You pay more because you had more outstanding. But, when you prepay, you have reduced the outstanding. Agreed.

But what happen to the interest you already paid? its the interest calculated on the initial amount believing that you will be utilizing for next tenure years. Now, by pre-paying, you have "wasted" that excess money.

I can understand the feeling when one stays in their own house and its fully yours. But the question is - advisable or not. And it depends on person to person.

What will happen if you lose your job, parents are ill etc etc? That's certainly not the end of the world. You can still rent it out and move for a lower rental house, you can sell those, etc.

What will happen if person dies? That's again covered by insurance if you had properly insured.

So, its only the "feeling" that says you are less liable now.

And at the end - how many people really "follow" advise

[mandyrana]

For me I prepaid car and home loan. I took homeloan from ICICI ROI was 13.25 % and i was paying more interest than principle, also everybody knows how ICICI charges from its old customers.. So to have peace of mind it is better to prepay loan.

[mjothi]

Originally Posted by mandyrana

So to have peace of mind it is better to prepay loan.

You can also transfer it to a public sector banks

[sanman18]

Originally Posted by tacho

This is way too complicated for me but I want to know what the OP meant by RD. I've heard of Fixed Deposit before, but RD?

Here RD means Recurring Deposit.

Originally Posted by Abhay

phamilyman, perhaps you did not read my post right. That advice of not pre/part paying my loan was given to me by a CA but I did not take it!
We did some part payment and finally last year we fully paid up the outstanding amount. In the uncertain job market, even if I lose my job today atleast I do not have to pay a single rupee per month to stay in my own home. That was the rationale behind it :=)

As I already shown in calculations ,what we assume is that if we had money,then instead of prepayment the amount , we deposit this money in FD. So even if you have no money in future due to some reasons , then also you can certainly prepayment by the money deposit in FD

[phamilyman]

abhay,

aplgs if the tone sounded like u were wrong - i was more like giving a counter advise.

Tomer bhai,

maybe my savings are not at your level :-)

My question is about pf/gratuity - i've not worked long enough/researched enough to know how i can withdraw it. personally, i assume its in a time capsule to be taken out after 15 years

As for notice money etc - don't bank on it in today's age - though a friend got fired with 6 months pay, and rejoined a competitor (IT) at a better pay in 15 days. Yes, not everyone can be lucky.

[ntomer]

Originally Posted by phamilyman

My question is about pf/gratuity - i've not worked long enough/researched enough to know how i can withdraw it. personally, i assume its in a time capsule to be taken out after 15 years

As for notice money etc - don't bank on it in today's age - though a friend got fired with 6 months pay, and rejoined a competitor (IT) at a better pay in 15 days. Yes, not everyone can be lucky.

You can withdraw your PF, if you are unemployed for 60 continuous days; and become eligible for gratuity if you have worked for more than 5 years in a company.

And what has finding next job has to do with notice money, I will get it anyways. My point was that with severance payments (notice money, PF, gratuity, encashed PLs etc.) I will be able to sustain a similar lifestyle easily for 1.5-2 years. Therefore it was a wise choice for me to invest the surplus cash rather than pre-paying the loan because I'll get better returns this way.

And in the worst case, I can always sell the second home, can't I?

Nitin