Okay, that looks like a scam. Well, it’s a header bait. But actually, I saved myself that amount of money by making an informed decision about my home loan.
Along the process of making an informed decision on my home loan, I learnt that paying 10% rate of interest is better than paying 8.75%. It’s a pretty unique situation of mine that makes it TRUE!!
How? Let me share you my story. But before I begin, a big Thanks to BankBazaar. Because the story starts and ends with them. On BankBazaar.com, you can get instant customized quotes for loans and easily compare the total costs of the loan offers made to you.
Let me share my home loan details. I took a loan of Rs 10 lacs in August, 2004. The starting rate of interest (ROI) was 7.25%. After going to a peak ROI of 11%, it has now come down to 10.25%.
The starting EMI was just Rs 7900.00 but as the rates skyrocketed, the EMI was raised to Rs 8951.00.
I have prepaid an amount of Rs 3 lacs from time to time. As on date, the outstanding principal balance is Rs 6.20 lacs. In other words, the outstanding balance would have been Rs 9.20 lacs if I had not prepaid Rs 3 lacs.
That also means that for the last 5 years when I have paid over Rs 5 lacs in EMI, the actual Principal that has been repaid is just Rs 80,000!! (Phew, the EMI principle is so skewed in favour of lenders!)
Anyway, let’s come back to my home loan story. The banks are beginning to advertise attractive rates for new home loans with some hovering around 9% ROI. And when I checked with my own home loan ROI, they said it’s still 11% and will be reduced to 10.25% from August, 09 onwards.
It was time, I thought, to look around for a better home loan and get my loan transferred to a better rate.
I knew about BankBazaar. It’s a very powerful engine to search for the best quotes on loans. In a few minutes, I figured out a quote which looked very attractive. I was offered 8.75%.
The support functions at BankBazaar worked really well and within a few hours I got the phone call from the Bank offering 8.75%. They offered to collect the documents from me. The document required were already specified in the BankBazaar process and they added a foreclosure letter to be obtained from my existing lender.
While getting the foreclosure letter from my existing lender, I also asked for the amortization schedule for my loan. This amortization schedule tells you the portion of interest and principal in your EMI and tells you the reducing balance principal after every EMI payment. You also get to know how long it will take to repay the loan. Check this Loan Amortization Schedule
Now I saw that the total number of EMI payable is just 110. So the loan will be repaid in roughly 9 years. The total interest portion that has to be paid is Rs 3.66 lacs. (A)
On doing a similar exercise for my new loan offer @8.75% for 14 years, the total interest payout is Rs 4.75 lacs. Add the prepayment charge of 2% to be paid to the old lender and 1% processing fee to the new lender, the total interest and fee works out to Rs 4.94 lacs. (B)
The difference between these two scenarios (A & B) is Rs 1,27,535.00!!
So even though I get an offer @8.75% instead of the 10.25%, my total interest/fee cost is less than the lesser offer!
Learnings:
Surprising? Not if you figure out that the enhanced EMI is enabling me to make a part prepayment every time I pay an EMI. So even though I had taken a loan for 20 years, the enhanced EMI is helping me prepay the loan in just 14 years!
Another learning is that it is important to consider the repayment term of your loan. If I go in for a loan @8.75% for 11 years, the difference in interest/fee would be negligible. For less than 11 years, I will make some savings by transferring the loan.
Check out BankBazaar’s powerful Refinance calculator
Do you have anything to share about your home loan? Or do you have any questions? The comments section is awaiting your response.
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