Difference between home loan prepayment and foreclosure

You can easily build your own 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’.

home loan

What is the prepayment of a home loan?

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

Method of prepayment

It can be done in many ways, such as,

  1. Start with a small prepayment and pay any excess fund 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 make the full payment of your debt through the proper settlement process. This is known as the foreclosure of the home loan. It helps you in reducing your loan liability and ending the loan account before its scheduled EMI period. Here the payment should be made at one shot, and the account needs to be closed in full.

Method of Foreclosure

  1. Enclose a copy of your home loan account number, copy of PAN and a copy of 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 taking into account the amount paid so far. You need to pay the amount by cheque or online transfer.
  3. As you make your payment, the lender will complete the foreclosure procedures and EMI will come to a halt. They will return your property-related original documents within a few days.
  4. Besides these documents, you will receive a No Dues Certificate that stated you have no amount payable to them.

In case of a foreclosure, you have to make sure that all the documents are in good condition. You should also get your credit score updated by informing the credit rating agencies about the foreclosure. Foreclosure often involves a larger amount, while prepayment can be a gradual attempt to reduce your home loan liability. When planned well, both these options can reduce your home loan EMI calculator amount and home loan tenure.

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