Introduction to Pre-EMI
Making the decision to have a family is arguably the most significant financial decision you and your family will ever make. Additionally, for a majority of first time house buyers, a home loan is the only feasible way to own a home.
In the case where one wishes to get a home loan, it is very essential to know each and everything regarding it, after all, it is such an obligation that one will begin settling years when she or he will be able to support the entire loan amount. Did you know that there are two ways to repaying your loans, through EMIs? Yes – Pre-EMI and full EMI. Due to lack of information, not so many people understand the distinction between the two, which is very crucial since it can heavily ease your loan burden. Hence, let’s discover everything that you need to understand concerning a house loan pre-EMI.
What is Pre-EMI?
Equated monthly installment (EMI) in Loan is also termed as Equated Monthly Instalment this is abbreviation of the term known as Equated Monthly Instalments. This is the repayment that the loaner is obligated to pay the lender on a monthly basis. Repayment of the principal amount as well as payment of interest on the outstanding balance of the loan is included in this payment.
Property loans can be a little tricky. If you are firm on taking a loan for a property that is still under construction, there is a need to pay a term known as ‘Pre-EMI’. A pre-emi is essentially a combination of the words pre and equated monthly installment (EMI). In order to reduce the pre-emi amount one has to understand what equated monthly installments are. Most of the times, an interest free amount termed as ‘loan amount’ is first paid to the bank and a minimum of two disbursements are made in order to construct the property. For the moneys that have already been paid there is a need to pay an interest on it as per the law and this is referred to as pre-emi interest.
Regardless of the structure of the loan, be it a straight line payment or reducing balance, pre-emi interest must be paid first. The loan ends up being lower when these two are paid. However, don’t start paying pre-emi until the property has been fully constructed as this will increase the period of the loan. Pre-emi and the straight line payment structure are directly related and depend on one another. As a general rule how does pre-emi work? Pre-emi and equated monthly installments do not get paid until the property has been fully constructed. Once the house is ready to move in, pre-emi begins to pay itself off. This usually takes up to three years and ends once the owner has ownership.
Why opt for Pre-EMI?
Lower Starting Costs
In order to do that, it makes sense that you would be able to commence paying both EMI and the principal within the first month since you already have the funds right there. One may say that starting with monthly payments does ease the repayment burden of principal and interest, but people still tend to not do it. The borrowers in expensive rental markets who want to avoid commencing the principal repayments straight away may under some contracts commence what is referred to as the Pre-EMI, meaning paying only the interest on the unreleased portion of the loan. Customers may also opt to first pay pre-EMI before commencing the EMI stage at any time from the disbursement till the possession of the unit.
When Should You Not Use Pre-EMI?
There is also the option of exercising this choice if you find your loan payments consisting of an EMI to be little too high for your current cash flow situation. You can use this strategy if there’s an urgent need of credit and you want to keep some money aside for that. However due to the low interest rate associated with pre-EMIs, it allows you to set aside the difference in order to make a profitable investement.
If you have defaulted on a repayment on time or not at all you are most likely to have been paying a Pre-EMI interest on mortgage loans, therefore let’s breakdown the term Pre-EMI for you. Pre-EMI’s stand for pre- exploration management Institute, and according to the situations around your location they might be very beneficial to you. A couple of tips to keep in mind before using the Pre-EMI option, first assess fully if there’s grant money for getting the property, does the property in question have any foreseeable or wanted returns and how long do you expect to be… into mind.
Considerations before making the loan.
Assess and evaluate how much cash flow do you have available, are you expecting to cash flow in the future and do you have alternative investment currencies at hand. Or for more case scenario are you able to repay the loan via cash in time, which is much more important to handle because you need to think if the house will serve your purposes for a long time. However there’s also another case in which you could readily figure in how much opportunity cost or surplus you are willing to pay on this.
- When investing make sure you review the different alternatives so you can achieve better returns.
Tax Deductions Implicit on Pre-EMI Options
Likewise, repaying the full EMI has the same tax deductibles with the aid of tax reduction pre-emi schemes as well. Interest that is paid in pre-emi options before transitioning into possession cannot attract a tax deduction however, after transitioning into possession and the lock in period there is an interest paid that can attract tax deductions. This is because after combining all the interests paid and owned the deductions are then evaluated for tax reduction five times in equal ratios. The provisions on house loan interest repayment under Indian Income Tax Act Section 24 govern the tax reductions herein. It should be noted that two hundred thousand rupees stands as the limit on deductions that can be made in one financial year.
Risks Involved in Pre-EMI Options
A few lenders will prevent the buyer from closing the loan partially irrespective of Pre-EMI being paid. According to the nature of Pre-EMI one of the main risks involved are construction delays as well as stalled construction projects. For whatever reasons that may under leverage in the future the consumer will be charged a pre-emi if the entity takes too long to possess its assets.
At times, the cottage loan provider would enroll the borrower ins the Pre-EMI option without establishing reasons for that. This is very Dangerous. Your repay starts to begin only after the occupation is granted to you. Thus, anything that you paid till now has not decreased your principal or tenure. If you had taken a 20 year term loan five years back and made a Pre-EMI payment for last five years, you can pay 5 + 20 years straight. Some lenders include the 5 years of Pre-EMI as part of 20 years and amortise your payment over a period of 15 years resulting in increased cost of EMI!
Also, by paying interest only to the lender, you do not have a single tax benefit, and some lenders do not even provide interest certificates.
Conclusion: Make Informed Decisions
Most of the people buying a new house do it through a home loan. It is advisable to consider a lender offering lower rates of interest. Utilizing a pre-EMI facility is a strategic move that you must take as a buyer. You have to consider the current market conditions, your cash/inflows and outflows and the potential resale value of the project. When your intentions with pre-EMI are crystal clear, you are in the position to make the right decision on how mortgage loan which you are taking for your new home can be paid off.
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Author – Dream Location
Dream Location is a trustworthy name in real estate in the country, and where it aims to connect the home hunters with the home purchasing process in a good, simple, and transparent way. We provide the buying public with informative and interesting articles that incorporate essential information on various aspects of the real estate industry.
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