Difference between home loan prepayment and foreclosure

You can easily build your home in today’s world with home loans from various banks and financial institutions. Once your dream house is ready, the biggest responsibility is to repay the loan in the stipulated period. To reduce the financial burden of repayment, you can also choose between ‘prepayment’ and ‘foreclosure.’

Difference between home loan prepayment and foreclosure 11


What is the prepayment of a home loan?

When the home loan repayment is completed in part or full before the scheduled period, it is known as the home loan prepayment. Prepaying helps you lessen the outstanding principal and reduces the borrowing cost against home loan interest rates and the loan period. If you have any surplus funds, you can invest them in prepaying your loan amount. Here, the payment need not be made in one go – you can create multiple payments toward your loan.

Method of prepayment

It can be done in many ways, such as,

  1. Start with a small prepayment and pay any excess funds as and when possible,
  2. Prepay a fixed amount towards your principal every year,
  3. Pay slightly higher than what your home loan EMI calculator requires you to pay every month.

What is the foreclosure of a home loan?

Before the term of the home loan ends, you can fully pay your debt through the proper settlement process. This is known as the foreclosure of the home loan. It helps you reduce your loan liability and end the loan account before its scheduled EMI period. The payment should be made in one shot, and the report needs to be closed in full.

Method of Foreclosure

  1. Enclosed is a copy of your home loan account number, a copy of your PAN, and your address proof, along with an application to your lender for foreclosing.
  2. After receiving your application, the lender will calculate the outstanding amount after considering the amount paid. You need to pay the amount by cheque or online transfer.
  3. As you pay, the lender will complete the foreclosure procedures, and EMI will halt. They will return your property-related original documents within a few days.
  4. Besides these documents, you will receive a No Dues Certificate stating you have no amount payable to them.

In foreclosure, you must ensure all the documents are in good condition. Foreclosure often involves a larger amount, while prepayment can be a gradual attempt to reduce your home loan liability. Both these options can reduce your home loan EMI calculator amount and home loan tenure when planned well. It would also help update your credit score by informing the credit rating agencies about the foreclosure.

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