Have you figured out if you are paying Pre-EMI or EMI for your housing loan? If not, then it is high time you understood the difference between the two.
When you are taking a loan to purchase an under-construction property, you might not notice if you are paying Pre-EMI or EMI for the loan amount. You know that you have to pay a certain amount of money every month either to your lender or to the bank. Some lenders may provide you with the flexibility of paying EMI after you get possession of the house. While this may be a very feasible option, you must get clarity on this matter before you start making payments.
Difference between EMI and Pre-EMI
EMI or Equated Monthly Installment is a fixed amount that you pay to your lender every month. This amount takes into account both interest charges and principal amount. An amortization schedule is used to calculate the amount of interest payable during the loan tenure.
Pre-EMI is applicable only when you have availed a part of the home loan you applied for. In such a case, you only have to pay the interest charges applicable on the principal amount till you avail the full loan amount. This amount needs to be paid every month and once the full loan amount is sanctioned, EMIs will commence.
Benefits of Opting for Pre-EMI
Pre-EMI is a good option if you don’t have enough cash flow. You can start paying a monthly installment of interest charges on the partially sanctioned loan amount. When you have enough funds, you can start paying EMI. This doesn’t imply that you have to wait till you get possession of the property. You can switch between the two options whenever you want.
When You Should Not Opt for Pre-EMI
Let’s assume that you have drawn 95 percent of the loan amount and the remaining 5 percent will be payable after you get possession of the property. But, if the project gets delayed by 6 months, you will end up paying Pre-EMI for 6 months. This amount will be close to the EMI amount. This doesn’t help you in any way because your acquisition costs increase and there is no reduction in the loan tenure.
If you face such a situation, you should start paying EMI after 70 to 75 percent of the loan has been drawn. This will help you in repaying the interest and principal amount and also reduce the loan tenure. However, not many lenders will offer this facility. You must discuss this option with your legal advisor or lender before applying for a home loan.
Risks Involved in Opting for Pre-EMI
If you are going to opt for Pre-EMI, then here are some of the risks that you should be prepared to take:
● Some lenders may not let you part-preclose the loan amount when you have opted for Pre-EMI. They will ask you to pay a few installments to the builder, but will not make any reductions in the loan amount.
● When you are applying for a home loan, always read the document carefully. A few lenders may automatically put you on Pre-EMI option. This can prove to be very risky for you. Therefore, always make sure that you know what you are signing up for.
● You don’t get any tax benefit when you are only paying interest charges. If you pay EMI for an under construction project, you will be able to claim tax refund on the interest charges over a period of 5 years. However, this option is invalid when you are paying Pre-EMI.
● Remember that when you get possession of the property, you will start repaying the loan amount. The Pre-EMI that you paid before getting possession will not reduce your principal amount or loan tenure.
Now that you have learned about the pros and cons of Pre-EMI, apply for a home loan accordingly. Also, if you don’t wish to pay Pre-EMI for under construction apartments, you can look for such projects on CommonFloor.com.